Wednesday, January 10, 2018

Hurco Rebounding With The Machine Tool Cycle

With machine tool orders picking up around the world, these are better days for Hurco (HURC), a small and somewhat specialized manufacturer of machine tools. The shares have reflected at least some of the improving market conditions, with the stock up over a third over the past year, beating the S&P 500, but lagging fellow small-cap tool manufacturer Hardinge (HDNG) over that time.

This past year (2017) marked a return to growth in the industry and a switch from the “peak to trough” to “trough to peak” cycle. If this next cycle is anything like the past, there should be another three to five years of growing orders, fueled by ongoing factory automation, the replacement of older, inefficient tools, and growth in markets like aerospace. Even if this cycle is on the shorter end, Hurco should be looking at a few years of revenue growth and margin leverage opportunity, and management has shown in the past that they can capitalize on healthy markets.

Valuation is tricky. Cash flow-based modeling in such a cyclical industry is hard and it tends to lead toward undervaluing companies on the way up and overvaluing them on the way down. Moreover, there are opportunities for Hurco to exceed my expectations in the U.S. and with gross margin improvement. So although the shares aren’t especially cheap on a DCF basis, a 7.5x multiple to my 2018 EBITDA estimate offers some additional upside.

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Hurco Rebounding With The Machine Tool Cycle

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