Slowing Orders At Hurco A Growing Risk

I always considered a cyclical slowdown at Hurco (HURC) a “when, not if” proposition, and it seems like the when is an increasingly near-term concern. Fiscal first quarter results weren’t bad, but a third consecutive decline in orders shouldn’t be ignored, particularly when major players in the machine tool market are calling for a double-digit decline in orders in 2019 and European demand appears to be weakening.

Hurco remains undervalued relative to industrial sector norms, but I’m pretty cautious about the outlook for a host of industrial sectors, including “general manufacturing” and it’s tough to get ahead owning even undervalued stocks in a weak cycle for the sector. Consequently, while I still like Hurco as a business and the valuation doesn’t appear demanding, it’s tough to recommend the shares unless you have a fundamentally more bullish view on the prospects for the North American and EU economies over the next 12-24 months.

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Slowing Orders At Hurco A Growing Risk

Signs Of A Slowdown For Hurco Getting Harder To Ignore

The slowdown in industrial demand that the market has been pricing into stocks since mid-2018 seems to now be showing up in some of the numbers, as the December ISM new orders figure saw a double-digit drop and German factory orders just posted the biggest decline (a little over 4%) in six years. Japanese machine tool orders went negative earlier in the fall, and it is looking as though weakness in China has spread into Europe and may be starting to show in North America.

None of this is good for Hurco (HURC), but it’s not exactly unexpected, as the shares have fallen close to 20% in the last six months. That puts Hurco’s performance a little below the average industrial and in between larger competitors like DMG Mori (OTCPK:MRSKY) and Okuma (OTC:OKUMF), and valuation is already starting to anticipate some revenue and profit declines in the coming years.

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Signs Of A Slowdown For Hurco Getting Harder To Ignore

DMG Mori Running On A Global Tool Recovery

Companies appear to be opening their wallets for capital investment once again, and that has been very good news for DMG Mori (OTCPK:MRSKY) ((6141.TO)). This Japanese (and German) leader in the machine tool space has seen its share price almost triple from its early 2016 lows and rise almost 80% in the last year as the company starts to leverage its strengths into an improving order cycle.

With 2017 being the first year of growth off a trough, DMG Mori ought to be looking forward to at least a few more years of solid order growth, fueled by underlying drivers that include a need to replace aging machinery, a need to automate to remain cost-competitive and deal with a skilled worker shortage, and new technologies. Even so, the strong run in the shares has already captured a sizable chunk of the value, and I would note that analysts don't seem ready to believe that this cycle will be as strong as past cycles.

DMG Mori is more richly-valued than Hurco (HURC) (which I own), and there are valid reasons why it should be - it's the largest player in the field, and it has exceptional scale and operating leverage, among other reasons. What's more, there would seem to be room for analysts to raise their expectations in the future if this cycle matches prior upswings. That said, a lot here is riding on the overall health and growth of global manufacturing, so the current spread between the share price and fair value isn't as robust as I'd like.

I would also warn U.S. investors that the ADRs for DMG Mori are not liquid at all. The Japanese shares, however, have no such problem and are a better option for those investors able and willing to go to the added trouble.

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DMG Mori Running On A Global Tool Recovery

Hurco Laboring Hard, But With Little To Show For It

My expectations back at the start of this year were that it would be a very tough year for the machine tool industry. It has managed to be even worse, and Hurco (NASDAQ:HURC) has definitely seen a significant negative impact from that market weakness. While an upcoming trade show next week could help drive some orders, and market participants seem to think that the North American market is bottoming out, the reality is that there aren't a lot of leading indicators to make an investor feel really confident right now.

I suppose this may be a time where Hurco's relative obscurity is an asset. While the business has most definitely weakened, the stock is down 5% over the past year and about 10% since my last update. That's worse than comparables like Hardinge (NASDAQ:HDNG), DMG Mori Co. Ltd. (OTCPK:MRSKY), and Okuma (OTC:OKUMF), but it certainly could have been worse given the sharp declines in orders and the margin weakness. Looking ahead, I do continue to believe that Hurco is undervalued, but I think the recovery could be a more protracted, patience-testing process than some investors will want to endure.

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Hurco Laboring Hard, But With Little To Show For It

Seeking Alpha: Hurco Waiting On A European Recovery

As I have written before, Hurco's (NASDAQ:HURC) size and focus on high-spec machine tools makes it a little more challenging to track relative to large players like DMG Mori Seiki, Okuma, and so on. Hurco's business isn't driven as directly by large OEMs in industries like autos and aerospace, but the company is highly sensitive to exchange rates and the demand for manufacturing in countries like Germany and Italy. To that end, the significant moves in foreign currency and the lackluster recent economic performance of Germany have become bigger headwinds for this small industrial.

It's highly improbable that Hurco's business is going to shift meaningfully toward North America anytime soon and it is likewise improbable that this tiny, thinly-traded stock is going to attract much sell-side attention. That suggests that investors will have to have some patience to see this work out as an investment idea, but I believe Hurco is capable of generating long-term mid-to-high single-digit FCF growth through mid-single digit revenue growth and modest ongoing margin improvement. That still supports a fair value in the low-to-mid $40's, though the outlook for revenue growth in 2015 is such that it may be harder for the stock to make a lot of headway.

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Hurco Waiting On A European Recovery

Seeking Alpha: Hurco Delivers Once Again

Companies leveraged to metalworking have seen pretty mixed performance in both their reported financials and stock performance this year. Hardinge (NASDAQ:HDNG) and Kennametal (NYSE:KMT) are both down double-digits on a year-to-date basis (about 22% and 15%, respectively), while MSC Industrial (NYSE:MSM) (a distributor, not a manufacturer) is up more than 12% and Hurco (NASDAQ:HURC) is up close to 50%.

I continue to be bullish on Hurco. The company's announcement in mid-July of a patent on combination 3D-printing and CNC machining certainly got some attention, but the basic underlying business at Hurco is progressing well and I believe that is the more important factor. I do have some concerns about the sustainability of order growth and gross margins, but these shares continue to look undervalued to me.

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Hurco Delivers Once Again

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: Challenging Markets Still Weighing On Hurco

At some point investors are going to tire of waiting for a recovery at Hurco (HURC) and they are going to move on to other names leveraged to industrial markets in Europe and the U.S.. I'm not at that point yet. While I do have concerns that Hurco is losing share to Asian rivals in both Europe and North America, I believe the discrepancies still have more to do with Hurco's focus on short-run systems and smaller customers.

The machine tool market is highly cyclical and tied to global manufacturing activity, but there is still scope for Hurco to gain share with its product development and marketing efforts. These shares have basically no coverage on the Street and the low volume suggests that is likely to continue (covering Hurco isn't a particularly promising money-making opportunity for a sell-side firm). Nevertheless, at a small premium to tangible book and with a potential recovery in the company's key markets in 2014, I believe these shares remain quite cheap.

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Challenging Markets Still Weighing On Hurco

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

Seeking Alpha: Earnings Recap - Hurco's Results Surpass Estimates

Hurco (HURC) is a tiny industrial company with almost no coverage, but size and popularity are no barrier to solid performance. Once again Hurco surprised investors with better than expected financial results, and while the company's largest market is seeing tougher conditions, the value in this stock is still worth considering.

Another Solid Quarter
Hurco reported 29% revenue growth for its fiscal first quarter, with Europe leading the way at 41% growth. Sales in North America rose 14%, while sales to Asia-Pacific rose 19% (but are only about 12% of the total). On a unit basis, North America saw 4% growth, while European shipments grew 25%.

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Earnings Recap: Hurco's Results Surpass Estimates

Seeking Alpha: Tiny Hurco Looks For A Big Recovery

The global recovery has been largely unimpressive and uneven, with stubborn unemployment in the U.S., sovereign debt and bank capital worries in Europe, and inflation worries in many of the fast-growing emerging markets. That has led to an uneven recovery in tiny machine tool company Hurco (HURC). Although Hurco has been punished along with most industrial concerns this year and there are definitely reasons to worry about the company's large European exposure, value-oriented investors interested in “companies that make stuff” should definitely consider this name as a 2012 recovery idea.

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Tiny Hurco Looks For A Big Recovery