Description

Hurco Companies (HURC) is your classic economically cyclical machine tools Company. It was written up in VIC about 7 years ago and this is essentially the same Company. Currently the Company is experiencing the slowdown in orders and sales that one would expect given the actions of the US FED and European ECB. Has the Company reached bottom? We don't know and neither does any one else. Will orders turn in the next 6 to 12 months as the FED and ECB end their tightening cycle? Most likely, but no guarantees. What is true is that we are close to the bottom of the cycle. In any case, with over $6 per share in cash and no debt, the Company can easily weather an extended downturn, which we think is unlikely. Going into an election year in 2025, at the first sign of a contracting Economy the FED will begin to cut rates. There is not much appetite for any kind of extended recession. Jay Powell is not Paul Volcker!

Why are we interested in this tiny cyclical Company? The shares are trading below ten year lows. More importantly, as classic deep value investors, we love buying dollars for 70 cents! HURC is a profitable, cash flow positive Company selling for about 70% of net current assets. This is one of those, now rare, Graham and Dodd net nets. We can buy the shares at a 30% discount to working capital, which includes $41 million or over $6 per share of cash. This values the Company's plant and equipment at zero. 

Hurco, founded in 1968, designs, manufactures and sells computerized machine tools, consisting primarily of vertical machining center (mills) and turning centers lathes to companies in the metal cutting industry. The Company has a worldwide sales, service and distribution network. The majority of the Company's control systems are proprietary, but they predominately use industry standard personal computer systems. The Company also sells individual components and replacement parts. The Company is truly international, for  a small Company. Headquartered in Indianapolis, Indiana, Hurco has sales, engineering and service subsidiaries in China, France, Germany, India, Italy the Netherlands, Poland , Singapore, the UK and, of course, the US. The Company has manufacturing and assembly operations in Taiwan, US, Italy and China.

The Company is constantly innovating and upgrading their equipment to keep at the forefront of their industry, with the objective of increasing customer profitability and productivity. The Company has made 5 acquisitions since 2013 to expand and improve its product line.

Recent Performance:

(Dollars in Millions)

                                          2023                    2022                 2021

                                         (9 Months)

Sales                  

Americas                              $58.6                 $96.0                 $86.3

Europe                                   89.7                  126.1                117.5    

Asia Pacific                             13.3                   28.8                  31.4

Total                                     161.7                 250.8                 235.4

Sales for the recent third quarter decreased 7% compared to the prior year. The US, China and Germany saw softening conditions while the UK, Italy and France demonstrated stronger sales. The Americas decreased 23% while European sales increased 8%. Most importantly, orders for the third quarter 2023 decreased by $10.8 million to $42.1 million. Orders in the Americas decreased 33% and 17%, respectively, for the three and nine months in fiscal 23. European orders decreased 3% and 8% for the corresponding periods and Asia Pacific orders decreased 43% and 42%, respectively.

Gross profit was $13.5 million or 25% of sales in the third quarter compared to $14.4 million (25% of sales)  in the corresponding third quarter last year. SG&A was $12.4 or 23% of sales in the third quarter of 2023 versus $12.6 million or 22% of sales last year. Net income was $0.3 and $1.2 million in fiscal 2023 in the third quarter and nine months respectively,  compared to $2.0 million and $6.6 million, respectively last year.

The balance sheet remained pristine with $41 million in cash ($6.35 per share) and no debt. The current ratio was 4.10. The Company had a net current assets of $29.7 per share and a book value of $33 per share. The Company thus sells for 70% of net current assets and 63% of sales.

Yes, economic conditions clearly continue to be difficult but the Company continues to be profitable and has more than sufficient liquidity to weather any difficult times. The Company's performance clearly indicates the beginning of a recession which will ultimately lead to a FED and ECU cut in rates and a recovery in the economy.

This is not one of those overnight positions but one which will require patience. What is clear is that it is highly likely for the shares to begin to recover to the high twenties before the economic recovery is clearly established.

Management only owns 6% of shares outstanding, but classic value investor Chuck Royce holds 13.5% of the shares. Polar  Asset Management holds 12.4 % shares outstanding and Dimensional holds 7.9%.

The Company also pays an annual dividend of $.64 per share for a safe yield of 3.1%.

What is this Company worth? Clearly it should be at least the $30 in liquidation value, which implies a 50 % upside. Recovery earnings should come in at a range of $2.30 to $2.70 per share. If we value the Company at 10X recovery earnings of say $2.50 and add on the excess cash on the balance sheet of at least $5 we also get a valuation of approximately $30. 

Catalyst

1) Recovery of the worldwide economy.

2) Sale to a larger manufacturer.