Seeking Alpha: Overlooked Hurco Still A Good Play On Europe's Recovery

Never let it be said that I won't go to some lengths to find good ideas, particularly in the industrial space. Following recent pieces on such household names (alas, there's no sarcasm or irony font) like KUKA (OTC:KUKAY), a German industrial robot company, and Semperit (OTC:SEIGY), an Austrian rubber products company, I turn back home with a quarterly update on Hurco (HURC), an American machine tool company that generates about two-thirds of its revenue in Europe, and particularly in Germany.

Hurco remains a difficult company to benchmark, as its focus on user-friendly high-spec machines for small manufacturing jobs (either small companies or larger companies doing small/prototype batches) sometimes puts it outside the overall trends in machine tool activity in North America and Germany. Likewise, Hurco just isn't that much like DMG Mori Seki (OTCPK:MRSKY) (GIL.XTA), Makino (OTCPK:MKMLF), or Okuma (OTC:OKUMF), and privately-held Haas Automation isn't any help either as a comp. All of that said, I believe the Hurco story is developing well and the company remains a good play on the improving economic and manufacturing activity in Europe.

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Overlooked Hurco Still A Good Play On Europe's Recovery

Seeking Alpha: Hurco May Be Seeing The Turn

Machine tool manufacturer Hurco (HURC) has now logged two consecutive quarters with revenues above my expectations, and order flows appear to be improving. Combine that with improving orders reported by German and American machine tool associations and ongoing optimism regarding Europe and North America from Japan's machine tool association, as well as nascent signs of an industrial recovery Hurco's key European market, and maybe a little optimism is not out of place.

Investors considering Hurco as a way to play improving manufacturing conditions in Europe and North America should keep a few things in mind. This is an very illiquid stock and it is effectively unfollowed on Wall Street. It is also important to remember that machine tools are both deeply cyclical and erratically so - this recovery could disappear pretty quickly if issues like the dispute between Ukraine and Russia linger or worsen. It remains a significantly undervalued stock, though, and one that I believe is worth a closer look for investors who can bear the risks.

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Hurco May Be Seeing The Turn

Seeking Alpha: Hurco Disappoints Amidst A Murky Machine Tools Market

There's an old NFL Films clip of Vince Lombardi fuming along the sidelines and yelling out "What the 's goin' on out here?" That encapsulates my feelings about the machine tool market and Hurco's (HURC) place within it. Hurco's limited focus on short-run, high-spec systems reduces the comparability to larger firms like Gildemeister, Mori Seiki (MRSKY.PK), Okuma (OKUMF.PK), and Makino Milling (MKMLF.PK), but it's still frustrating to see the company fail to make progress with its revenue, margins, and order flow.

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Hurco Disappoints Amidst A Murky Machine Tools Market

Seeking Alpha: Hurco Virtually Unknown And Meaningfully Undervalued

Typically when a writer talks about a company being "under-followed" it means that there are no analysts from big name firms following the stock, or that what coverage there is from small retail-oriented shops. In the case of Hurco (HURC), though, there is no coverage.

None.

While this is indeed a small company with a very small float, it doesn't deserve to be completely ignored. Hurco is a small player in the global machine tool industry, but its high-spec tools address a legitimate market opportunity. What's more, the company's margins and returns on capital stack up quite well against some of the giants of the sector. While there is a frustrating cyclicality to this industry, Hurco shares look 30% to 50% undervalued on the basis of a long-term free cash flow model.

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Hurco Virtually Unknown And Meaningfully Undervalued