Enterprise Value = $184.21 million
Operating Income = $34.87 million
EV/Operating Income = 5.28x
Price/Revenue = .83x
Earnings Yield = 10%
Debt/Equity = 0%
Hurco’s specialty is metal cutting technology used in the manufacturing industry. Their products are considered machine tool products. The primarily sell equipment and software used for the cutting of metal on an industrial scale. They have been in this business since 1968.
The sale of new machine tools represents 87% of Hurco’s revenue. 1% of their revenue is sourced from the software to run their machines, while an additional 12% originates from servicing machines that are already in use.
Hurco is a global company, and 71% of its sales occur outside the United States. Hurco has grown steadily with the economic expansion since the global financial crisis.
Hurco is currently 35% off its 52-week high. The stock has been under pressure for a few reasons.
- This is a cyclical company. Hurco depends on the global economy and industrial production to continue growing. If we have a recession, Hurco will be adversely affected. Much of the pressure on the stock has been related to concerns about the global slowdown which started last year and the possibility of a recession.
- Key commodity inputs have been increasing in price, notably steel. The strength in steel prices is a reason I own steel companies separately in the portfolio.
- Hurco is a US company that derives 71% of its revenue from overseas. A trade war is bad news for Hurco.
All of these concerns are legitimate, but I think the market has overreacted to each of them. A surprise on any of these fronts will improve the stock price: the US economy doesn’t enter a recession, the trade war is resolved, commodity prices decline and improve margins. This is a bet that one of these current worries will go away.
In terms of the long-term competitive position of Hurco, I also think they are in a good place. A recession will only be a temporary problem for Hurco, mainly due to the strength of their balance sheet. Hurco carries no debt, and they currently have a massive cash stockpile. Management is clearly well aware of the cyclicality of their industry and is well prepared for it. The current price of the stock is $36.69. $10.25 of that price is cash. The financial strength is also reflected in a excellent F-score of 7. The financial quality of Hurco and cash position limits the downside.
From a valuation standpoint, Hurco is attractively valued compared to its history and its peers. The enterprise multiple of 5.28 compares to a 5-year average of 8.31. An increase to this level would represent a 57% increase from current levels. The P/E of 10 compares to an industry average of 20.81 and a 5-year average for Hurco of 16.21. On a price/sales basis, the current value of .83x compares to an industry average of 1.29x and a 5-year average for the company of .98x.
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