It is looking like this is going to be a "yeah, but" sort of earnings cycle for the stocks in my portfolio. Both Monsanto and MSC Industrial delivered quarters that were "yeah, but" -- yeah, they had good earnings/growth/performance, but the guidance wasn't what analysts and institutional investors wanted.
So ... Hurco (Nasdaq: HURC).
I have liked (and owned) Hurco shares for a long time, and I've seen the stock in this machine tools company go from crazy-stupid heights to crazy-stupid lows. But that's what happens when a company nearly doubles its revenue in three years (2004-2007) and then sees its revenue whacked by more than 50% as the recession went straight after the company's jugular.
With the economy back on a healthier footing, this company is seeing a recovery in its business and the stock. Unfortunately, the recovery has not been as full-throated as I had hoped.
The company reported that revenue jumped 50% this quarter to $34.7 million (yeah, we're talking about a small company here folks). That also represented sequential growth of 31% and that is of course quite strong. Growth was strongest in North America, where sales grew 116% to almost $9M, while Asia-Pacific grew 89% to 3.6M. Sales to Europe grew 30% to $22.4M, which is a pretty good result considering the basket-case conditions of some parts of Europe.
Order flow was also solid - up 80% from last year's level, and strong enough to provide a book-to-bill of 1.04. While the company does seem to be making good progress with customers in places like India and China, a better recovery in Europe really is mandatory for the company to do well in the short term.
Unfortunately, the company did not do so well with profitability. Gross margin came in at 24%, which was a nice sequential jump from the 17.6% result in the third quarter, but still shy of what I'd hoped to see. Perhaps the company couldn't adjust to the higher level of production this quarter, and maybe the company suffered from some lower-end/entry-level orders, but this number has to be better for the stock to get moving.
Although the company did okay with its operating expenses (excluding some one-time items), the company did still post an operating loss for the quarter - another modest disappointment.
The company did not give much in the way of guidance, other than to point to improvements in Europe and comment that a return to pre-recession levels of production (and hopefully profitability) was underway.
Of course it was foolish to hold this stock through the recession, but I dramatically underestimated how badly the recession was going to hurt business. Although the company's machine tools are very competitive, the company's customers tend to be small - precisely the sort of customers that found their financing and credit options vanish during the worst of the recession. Now things are better, and orders are coming back, but I sometimes wonder how many of their customers survived the recession.
In any case, I have a price target now of $33.00 per share. I am assuming that the company can reclaim peak revenue by 2015 and achieve a similar level of free cash flow production. That suggests free cash flow growth of 18% for the next five years (starting with my estimate of about $9M for next year), and I'm projecting a CAGR of 7% in FCF for the five years after that. Discounting that at a 12% rate and including the cash on the balance sheet leads to a target of $33.
I am curious what the company might do with its cash hoard - $48 million is not a lot, and the company certainly found it useful to have a liquid balance sheet during the recession, but I have to think there are acquisition options out there if the company is wants to do a deal. Given how a lot of the manufacturing that requires machine tools is now done overseas, though, it would not be surprising to see a deal in Europe as the next move.
In the meantime, I'll be holding these shares and hoping for an ongoing global rebound in manufacturing activity. Certainly this is a riskier idea than a stock like Danaher (NYSE: DHR), Eaton (NYSE: ETN), or ABB (NYSE: ABB), but I like the small manufacturing industry angle and I think it's a respectably well-run micro-cap stock.
BUY shares of Hurco (risk-tolerant/aggressive investors only!)
Disclosure: I own shares of Hurco
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