I have to admit that I was pleasantly surprised by the results that Hurco reported on February 28, 2008. Congrats to all the longs that stayed long despite all the market volatility.
Sales and Bookings
Sales in Q1 of fiscal 2008 increased $20 million, or 30%, to $60.9 million from $46.9 million in the year-ago quarter. Sequentially, sales increased 21.6%. In my Hurco financial model, I have quarterly results going back 15 quarters. Looking at my model, the 21.6% sequential in sales was the largest sequential increase.
In Q4 2007, Hurco’s bookings were a record $54.8 million and that set the stage for the strong sales in Q1 2008. Bookings in Q1 2008 set another record of $61.2 million and would seemingly set the stage for strong sales in Q2. Again looking at my model, the sequential increase in bookings the last two quarters were the best back-to-back quarters for sequential increases going back to the same two quarters two years ago. The sequential increases in both instances can likely be attributed to the EMO.
Here are my list of reasons behind Hurco’s recent growth in sales and bookings:
1) The Exposition Mondiale de la Machine Outil, or EMO, is the largest trade fair for the machine tool industry. It is held every other year around the end of September in Hannover, Germany. Aside from giving Hurco the opportunity to demonstrate new products, the EMO has historically accelerated Hurco’s sales and bookings in subsequent quarters.
2) Over the past couple of years, Hurco has been expanding its geographic footprint with both sales offices and manufacturing facilities. In the Q4 press release, Mr. Doar, Hurco’s CEO, highlighted the importance of the company’s global strategy and how it has contributed to the company’s recent success. About a year-ago we heard the first rumblings about India. Today, we heard some rumblings about Eastern Europe. Despite the slowdown in the U.S., Hurco is reaping the benefits of its global strategy and footprint. International sales were at their highest level this quarter than any other quarter in my model.
In my conversation with Mr. Oblazney, Hurco’s CFO, a couple of quarters back, I asked him about Hurco’s activity in China and India.
Given the difficulty in establishing a business in India, Mr. Oblazney was a little reserved with his expectations for near-term growth in India. As such, it was nice to see that India added to sales in the APAC region. Note that APAC sales were up 29% YoY but down 24% from the prior quarter. As the APAC region only accounts for a few million in sales per quarter, the quarterly fluctuations are to be expected and investors should look for a long-term trend.
3) Hurco released the Winmax control system in 2007. Prior to the release of Winmax, management was seemingly pretty excited about this new control system and made specific mention of it in a couple of press releases. For Hurco management, any press release is a big deal. Management very rarely issues press releases so when they issue a press release and show a hint of excitement, investor take notice. Around the time Winmax was released, Royce and Associates bought a large number of Hurco shares. I speculated that this purchase was at least partially tied to Royce’s expectations for Winmax to boost sales.
Going back to my conversation with Mr. Oblazney, Winmax wasn’t expected to directly boost revenues but it was expected to significantly improve the competitiveness of all Hurco’s products. While Wimnax was released in the U.S. sometime around early May, the EMO marked the global rollout. Based on Hurco’s recent success, Winmax seems to be living up to management’s expectations.
4) In 2007, Hurco also introduced its VMX84, the largest vertical machining center in its product lineup. I am pretty sure this was one of the products on display at the EMO. Note that management recognized sales of higher-end VMX machines as a driver of sales and margins on the quarter.
5) About a year-ago, I wrote my first blog entry on Hurco. In that blog entry, I highlighted the weak U.S. dollar as having a favorable impact on Hurco’s financial results. I also highlighted the weakening dollar as one of the reasons I expected sales to continue to accelerate. In the last few quarters, we have been seeing the benefits of our poor beaten down dollar. In the most recent quarter, the dollar had a favorable impact on sales of $4.6 million. Keep in mind that the favorable impact on sales is offset somewhat by foreign operating and manufacturing expenses.
Margins
Gross margins increased to 40.8% from 37.9% in the prior quarter and 37.0% the year-ago quarter. Management credited the nearly 400 basis point improvement in gross margins to increased sales of higher margin VMX sales in Europe and the favorable impact on the dollar.
SG&A as a percent of sales was 20.31% compared to 22.43% last quarter and 19.43% in the year-ago quarter. The percentage decrease from last quarter was likely the result of fixed costs being spread over a higher level of sales. The dollar increase in SG&A spending of $3.1 million over the year-ago level was the result of increased spending on sales, development and market expansion. Translation of foreign operations back to USD also contributed to the dollar increase in earnings.
Operating margins increased to 20.5% from 15.5% in the prior quarter and 17.22% in the year-ago quarter. Is that right, did they really increase operation margins 500 basis points over Q4 2007? While Q4 2007 operating margins were abnormally low, Q1 2008 operating margins still represent a very nice sequential increase. The improvement in operating margins were the result of the factors listed above.
Hurco’s profit margin of 12.81% for the quarter was an increase of 150 basis points over the prior quarter and 130 basis points over the year-ago quarter. The less drastic jump in sequential profit margins compared to operating margins was due to the higher tax rate in Q1 2008 relative to Q4 2007. The implied tax rate in Q1 was 36.7% compared to 30.3% in Q4.
According to my data, the gross and operating margins for the quarter were records. The profit margin for the quarter was not a record because of the benefit of loss carry-forward in Q4 of 2005.
EPS
I am calculating $3.62 in EPS over the trailing twelve months.
Balance Sheet
The balance sheet looks strong so I won’t go into a lot of detail. Hurco has no long-term debt and $35 million in cash and investments, or nearly $5 per share. Hurco’s strong balance sheets puts it in a healthy position to weather a downturn in the global economy.
DSOs increased to 43 days from 33 days in Q4. While the increase in DSOs might be a bit of concern for some, the 33 days in Q4 was an anomaly and likely a matter of timing of sales, billings and receipts. Looking over the past 15 quarters, the 43 days was easily on the low end of the historical range.
Inventory turns remained flat a 2.00.
Cash Flow Statement
Operational cash flow in the quarter was negative by about $3.7 million. The negative operational cash flow was largely due to the increase in receivables and to a lesser extent the increase in inventories. Given the acceleration of sales in the quarter, I am not overly concerned about either of these items. The increase in receivables was likely the result of both the jump in sales and the timing of shipments, billings, and receipts. Nonetheless, this is something worth watching in the coming quarters.
Other Thoughts
Hurco would seemingly make a nice acquisition for a foreign machine tool manufacturer for a number of reasons:
1) Strong balance sheet
2) High level of international sales
3) Winmax could be leveraged across the acquirer’s products
4) Strength of foreign currency relative to the dollar would make Hurco cheaper
5) Progress already being made in emerging markets (China, India, Eastern Europe, etc.)
I am not sure a buyout would be in the best interest of long-term shareholders but the prospect is at least interesting.
As an alternative to being acquired, Hurco could be on the prowl for an acquisition. The recently announced mixed shelf and the language in the recent 10Q suggest that an acquisition is a very real possibility.
Here is the language from the Executive Overview section of the 10Q:
“Our introduction of new, technologically advanced products, combined with our expansion into new markets, has resulted in our significant growth over the last several years. In addition to this strong organic growth, our recent performance and current financial strength also provide us with the capability to pursue opportunistic acquisitions that are consistent with our strategic focus on expanding our product line and entering new markets.”
And, from the Liquidity and Capital Resources section of the 10Q:
“Although we have not made any significant acquisitions in the recent past, we continue to receive information on businesses and assets, including intellectual property assets that are being sold. Should attractive opportunities arise, we believe that our earnings, cash flow from operations, borrowings under our bank credit facilities, and the sale of securities from our shelf registration would provide sufficient resources to finance any such possible acquisitions.”
Disclosure
I am a long-term holder of Hurco. As always do your own DD and don’t rely on my BS as a basis for making investment decision.
Good luck!
Tuff
Showing posts with label HURC. Show all posts
Showing posts with label HURC. Show all posts
Wednesday, March 26, 2008
Wednesday, August 22, 2007
Hurco Train Keeps Chugging
Last week, Hurco Companies, Inc., ("Hurco" or Ticker Symbol: HURC), a designer and producer of computerized machine tools, reported results for its third fiscal quarter of 2007, ending July 31, 2007. Given the spike in Hurco’s share price following the release of earnings, the market clearly liked the results. Looking at the details of the report, the market reaction was seemingly well justified.
Sales & Service Revenue
Revenues increased 14.3% sequentially and 32.7% year-over-year. In my financial model for Hurco, I have quarterly data going back to the second fiscal quarter of 2004. Looking at my model, I noticed that this was the first time Hurco reported a sequential increase in revenues for its fiscal third quarter. Sequential revenues decreased 0.72%, 4.63% and 2.1%, in the third fiscal quarter of 2006, 2005, and 2004, respectively. Given the historical weakness in the third quarter relative to the second quarter, the sequential jump in revenues was somewhat surprising. At the same time, I should note that revenue growth in the second quarter was a little below normal. The below average growth in the second quarter and the above average growth in the third quarter was likely the result of the timing of orders, shipments and the availability of new products.
Again, looking at the quarterly data available in my model, I noticed that Hurco increased revenues on a year-over-year basis at the second highest rate next to the 47.0% in the first fiscal quarter of 2007. The next fastest rate came in the second quarter of 2005 when revenues grew 27.8% year-over-year. With the high level of revenue growth in the first and third quarters, Hurco is in a position to exceed the high level mark for annual sales growth set in 2004.
Over the past few years, Hurco’s annual revenue growth has decelerated. In 2004, Hurco reported annual revenue growth of 31.8%. In 2005 and 2006, revenue growth slowed to 26.1% and 18.3%, respectively. Through the first nine months of fiscal 2007, revenues are up 30.9%. With the upcoming EMO in Hannover, Germany, the high level of order bookings in recent quarters, and the release of exciting new products, Hurco’s sales growth in 2007 should easily exceed 2005 growth and potentially 2004 growth.
Gross Margins
Gross margin for the third quarter of 37.9% was in-line with the last few quarters but up 286 basis points from the year-ago quarter. Management attributed the higher margins to increased volume and product mix. With the recent release of VMX84 and WinMax along with higher sales volume coming off the EMO, I expect gross margins to increase next quarter and potentially hit new record highs. Longer-term, I expect gross margins to experience further improvement as a result of the manufacturing facility in China.
Selling, General & Administrative Expenses
Selling, general and administrative expenses increased to $10.2 million from $7.4 million in the year-ago quarter. Management attributed the dollar increase in SG&A to foreign currency translation of foreign operating expenses and expenses related to market expansion, commissions, and other administrative expenses. As a percentage of sales, SG&A expenses were largely in-line with historical levels.
Operating Margins
Hurco’s operating margin in the quarter was 16.87%, up 53 bps from last quarter and 200 bps from the year-ago quarter. Operating margins were higher for the reasons mentioned above.
Income Tax
Hurco’s income tax provision on the quarter was $3.7 million or 41.5%. The tax rate was higher than last quarters 37.1% and the year-ago quarters 30.21%. The higher rate in the quarter was likely a result of annual adjustments. I expect the tax provision next quarter to be back around 35-37%.
Net Income
Hurco reported earnings of $5.2 million or $0.80 per diluted share. Despite the higher tax rate in the quarter, earnings were up 10.3% from the prior quarter and 35.8% from the year ago quarter.
Order Bookings
New booking in the quarter were a record $48.6 million. With the upcoming EMO show and Hurco’s product offering going into the show, I expect Hurco to report another record quarter for bookings in the fourth quarter. On the year, bookings are up 28% over last year.
Balance Sheet
Hurco has over $37.2 million in cash (+$2.8 million on the quarter) and no long-term debt. On the balance sheet, Investments of $2.1 million, was a new line item. We will have to wait for the 10Q for information relating to this line item. The only other item worth noting on the balance sheet was the 19% sequential increase in inventories. With the high level and growing number of quarterly order bookings along with the upcoming EMO, the increase in inventory seems reasonable. In the second quarter of fiscal 2006, inventories also increased by a similar amount and for similar reasons.
Valuation
Hurco’s trailing EPS is $3.11. As I write, Hurco is trading at $48.62 yielding a PE of 15.63. At the same time, Hurco has nearly $6 in net cash (cash less LT debt). While I don’t have all of the information necessary from the most recent quarter to calculate the EV/EBITDA, I estimate Hurco to be trading at a EV/EBITDA of 8.6.
Year-to-date revenues have grown 30.9% and earnings have grown 41.6%. At the end of the fiscal year, revenue growth and earnings growth will, at the very least, exceed the growth rates of fiscal 2006. Analysts expect earnings to increase 20.4% in 2008 and 28% over the next 5 years. If I assume an annual growth rate of 20%, below historical and estimated growth rates, and a reasonable PEG of 1, Hurco should be trading at a price of $62.20. At $62.20 the EV/EBITDA would be a reasonable 11.5.
Conclusion
Quarter-after-quarter, Hurco has exceeded my expectations. Furthermore, Hurco has continued to increase its new order bookings, rollout new and innovative products, expand its global footprint, and increase operational efficiencies. While management does not issue a lot, if any, press releases, host conference calls or do a whole lot to update the investment community, their ability to manage the company is self-evident. While I consider Hurco shares to be cheap, I am confident that Hurco will continue to post strong results and the share price will appreciate accordingly. Going forward, I expect shares to move higher from both earnings expansion and PE expansion.
Good luck,
Tuff
Disclaimer
Long Hurco since it was introduced to me in the Motley Fools’ Hidden Gem newsletter in 2004.
Other Links
SeekingAlpha Article
Hurco Companies, Inc. (Public, NASDAQ:HURC)
Sales & Service Revenue
Revenues increased 14.3% sequentially and 32.7% year-over-year. In my financial model for Hurco, I have quarterly data going back to the second fiscal quarter of 2004. Looking at my model, I noticed that this was the first time Hurco reported a sequential increase in revenues for its fiscal third quarter. Sequential revenues decreased 0.72%, 4.63% and 2.1%, in the third fiscal quarter of 2006, 2005, and 2004, respectively. Given the historical weakness in the third quarter relative to the second quarter, the sequential jump in revenues was somewhat surprising. At the same time, I should note that revenue growth in the second quarter was a little below normal. The below average growth in the second quarter and the above average growth in the third quarter was likely the result of the timing of orders, shipments and the availability of new products.
Again, looking at the quarterly data available in my model, I noticed that Hurco increased revenues on a year-over-year basis at the second highest rate next to the 47.0% in the first fiscal quarter of 2007. The next fastest rate came in the second quarter of 2005 when revenues grew 27.8% year-over-year. With the high level of revenue growth in the first and third quarters, Hurco is in a position to exceed the high level mark for annual sales growth set in 2004.
Over the past few years, Hurco’s annual revenue growth has decelerated. In 2004, Hurco reported annual revenue growth of 31.8%. In 2005 and 2006, revenue growth slowed to 26.1% and 18.3%, respectively. Through the first nine months of fiscal 2007, revenues are up 30.9%. With the upcoming EMO in Hannover, Germany, the high level of order bookings in recent quarters, and the release of exciting new products, Hurco’s sales growth in 2007 should easily exceed 2005 growth and potentially 2004 growth.
Gross Margins
Gross margin for the third quarter of 37.9% was in-line with the last few quarters but up 286 basis points from the year-ago quarter. Management attributed the higher margins to increased volume and product mix. With the recent release of VMX84 and WinMax along with higher sales volume coming off the EMO, I expect gross margins to increase next quarter and potentially hit new record highs. Longer-term, I expect gross margins to experience further improvement as a result of the manufacturing facility in China.
Selling, General & Administrative Expenses
Selling, general and administrative expenses increased to $10.2 million from $7.4 million in the year-ago quarter. Management attributed the dollar increase in SG&A to foreign currency translation of foreign operating expenses and expenses related to market expansion, commissions, and other administrative expenses. As a percentage of sales, SG&A expenses were largely in-line with historical levels.
Operating Margins
Hurco’s operating margin in the quarter was 16.87%, up 53 bps from last quarter and 200 bps from the year-ago quarter. Operating margins were higher for the reasons mentioned above.
Income Tax
Hurco’s income tax provision on the quarter was $3.7 million or 41.5%. The tax rate was higher than last quarters 37.1% and the year-ago quarters 30.21%. The higher rate in the quarter was likely a result of annual adjustments. I expect the tax provision next quarter to be back around 35-37%.
Net Income
Hurco reported earnings of $5.2 million or $0.80 per diluted share. Despite the higher tax rate in the quarter, earnings were up 10.3% from the prior quarter and 35.8% from the year ago quarter.
Order Bookings
New booking in the quarter were a record $48.6 million. With the upcoming EMO show and Hurco’s product offering going into the show, I expect Hurco to report another record quarter for bookings in the fourth quarter. On the year, bookings are up 28% over last year.
Balance Sheet
Hurco has over $37.2 million in cash (+$2.8 million on the quarter) and no long-term debt. On the balance sheet, Investments of $2.1 million, was a new line item. We will have to wait for the 10Q for information relating to this line item. The only other item worth noting on the balance sheet was the 19% sequential increase in inventories. With the high level and growing number of quarterly order bookings along with the upcoming EMO, the increase in inventory seems reasonable. In the second quarter of fiscal 2006, inventories also increased by a similar amount and for similar reasons.
Valuation
Hurco’s trailing EPS is $3.11. As I write, Hurco is trading at $48.62 yielding a PE of 15.63. At the same time, Hurco has nearly $6 in net cash (cash less LT debt). While I don’t have all of the information necessary from the most recent quarter to calculate the EV/EBITDA, I estimate Hurco to be trading at a EV/EBITDA of 8.6.
Year-to-date revenues have grown 30.9% and earnings have grown 41.6%. At the end of the fiscal year, revenue growth and earnings growth will, at the very least, exceed the growth rates of fiscal 2006. Analysts expect earnings to increase 20.4% in 2008 and 28% over the next 5 years. If I assume an annual growth rate of 20%, below historical and estimated growth rates, and a reasonable PEG of 1, Hurco should be trading at a price of $62.20. At $62.20 the EV/EBITDA would be a reasonable 11.5.
Conclusion
Quarter-after-quarter, Hurco has exceeded my expectations. Furthermore, Hurco has continued to increase its new order bookings, rollout new and innovative products, expand its global footprint, and increase operational efficiencies. While management does not issue a lot, if any, press releases, host conference calls or do a whole lot to update the investment community, their ability to manage the company is self-evident. While I consider Hurco shares to be cheap, I am confident that Hurco will continue to post strong results and the share price will appreciate accordingly. Going forward, I expect shares to move higher from both earnings expansion and PE expansion.
Good luck,
Tuff
Disclaimer
Long Hurco since it was introduced to me in the Motley Fools’ Hidden Gem newsletter in 2004.
Other Links
SeekingAlpha Article
Hurco Companies, Inc. (Public, NASDAQ:HURC)
Friday, May 18, 2007
Analyzing Hurco
Hurco Companies, Inc. (Public, NASDAQ:HURC)
Sales
Sales for the quarter increased 15.28% to $42.49 million from $36.86 million in the year-ago quarter. At the same time, sales slipped 9.35% from the first quarter of fiscal 2007 and 1.55% from the fourth quarter of fiscal 2006. It is important to note that the fourth quarter of fiscal 2006 and the first quarter of fiscal 2007 benefited from the IMTS, the largest U.S. trade show, which was held in September of 2006.
Based on my conversation with Hurco’s CFO, quarterly sales are largely driven by the release of new products. To the best of my knowledge Hurco did not release any new products in the quarter. While the management mentioned the release of the much anticipated Winmax control software and the introduction of Hurco’s largest vertical machining center, the VMX84, it is my understanding that these products were not available for shipment until after the close of the quarter. The release of these two products bodes well for future quarters. The new Winmax control system, with 25 new features, will increase the competitiveness of all Hurco’s machine tools. The VMX84, with its ability to machine large parts, will open Hurco to a new group of customers.
Aside from the new products mentioned above, future quarters should continue to benefit from a weaker U.S. dollar and growing demand in Europe and Asia. While machine tool consumption has been on the decline in the U.S. since the IMTS last year, the most recent machine tool consumption report showed a nice rebound in March after several months of declines. For the full year, industry experts are looking for “steady growth” in the U.S. during 2007. Furthermore, the current quarter is likely to see some benefit from Eastec, a smaller regional U.S. trade show being held next week.
Bookings
If you think the lower sequential sales in the second quarter are a sign of a slowdown…think again. Order bookings increased 31.05% to $48.47 million from the year-ago quarter. If my history is correct, this was the fourth consecutive quarter of record bookings.
As I compare the consecutive quarter of record bookings to sales in the last couple of quarters (book-to-bill ratios), I am led to believe that bookings in the last couple quarter included orders for the VMX84 and the Winmax control system, which were not available for shipment until the current quarter.
Margins
Gross margins improved to 38.47% in the current quarter compared to 36.96% in the prior quarter and 35.75% in the year-ago quarter. Once again, I believe the 38.47% represents a record for Hurco. According to management, gross margins are largely driven by product mix and volume. Hurco’s continued improvement in gross margins demonstrates Hurco’s ability to focus on and compete with its higher margin products. The higher gross margins also demonstrate managements’ ability to manage costs. To this regard, Hurco management is expecting future margin improvement from the manufacturing facility in China.
Operating expenses as a percent of sales increased to 22.13% from 19.37% in the year-ago quarter. Operating expenses as a percent of sales were in the range of recent quarters but on the higher end of the range. Management attributed the higher operating expenses to incremental variable expenses related to market expansion, commissions and compensation expense. Considering Hurco’s recent expansion efforts in China and India, managements’ explanation is reasonable.
Higher gross margins for the quarter were offset by the higher operating expenses as a percent of sales resulting in relatively flat operating margins of 16.34%. Nonetheless, at 16.34%, operating margins were in the upper end of the recent range.
The increase in interest income offset somewhat by a higher tax rate in the quarter, resulted in higher net margins of 11.01% compared to 10.66% in the second quarter of 2006.
Future margin improvement can be expected once the sales and manufacturing operations in China become fully functional and sales in the region increase. Additionally, the VMX84 is likely a higher margin product. With the availability of the VMX84 in the current quarter, there will likely be continued improvement in gross margins.
Earnings
Earnings increased 19.11% from the year-ago quarter but slipped 13.25% sequentially for the reasons mentioned above. EPS for the quarter was $0.73 per diluted share putting the trailing 12-month EPS at $2.89 per diluted share. At a current price of $42.50, I calculate a trailing PE of 14.71. At the now higher price of $43.00 (share continue to rise during the day), I get am calculating an EV/EBITDA of 9.05.
Balance Sheet
Hurco is now free of long-term debt and the cash position increased over $2.1 million to $34.5 million or $5.40 per share. Hurco’s balance sheet remains exceptionally strong.
Cash Flow Statement
While a cash flow statement was not provided, it is reasonable to assume the $2.13 million increase in cash and the elimination of nearly $4 million in long-term debt was the result of another strong quarter of operational cash flows.
Looking Ahead to Next Quarter
I have put together my long-term argument for Hurco in previous blog posts (here). As for now, I will make a few positive bullet points for next quarter:
Expecting continued strength in Europe and Asia along with continued benefit from weaker U.S. dollar.
Expecting more of a rebound in U.S. machine tool consumption and I will be monitoring the U.S. Machine Tool Consumption Survey
Potential boost to U.S. sales as a result of Eastec
Higher book-to-bill ratios in recent quarters suggest some pent up orders for both Winmax and VMX84
Successive record bookings indicates that demand remains strong
Shipping of VMX84 and Winmax should result in continued margin improvement and will help expand customer base
Higher cash position and elimination of debt will result in higher net interest income
Slightly more favorable year-ago comparables
Conclusion
Despite the markets reaction today to missing estimates, Hurco once again reported a very solid quarter and the story remains the same. I continue to have faith in the long-term prospect for Hurco and at this point I am especially excited about the prospects for next quarter. Since I started writing, Hurco shares are already up a couple of dollars. Looks like smart investors are taking advantage of a discount.
Regards,
Tuff
Earnings Release
Sales
Sales for the quarter increased 15.28% to $42.49 million from $36.86 million in the year-ago quarter. At the same time, sales slipped 9.35% from the first quarter of fiscal 2007 and 1.55% from the fourth quarter of fiscal 2006. It is important to note that the fourth quarter of fiscal 2006 and the first quarter of fiscal 2007 benefited from the IMTS, the largest U.S. trade show, which was held in September of 2006.
Based on my conversation with Hurco’s CFO, quarterly sales are largely driven by the release of new products. To the best of my knowledge Hurco did not release any new products in the quarter. While the management mentioned the release of the much anticipated Winmax control software and the introduction of Hurco’s largest vertical machining center, the VMX84, it is my understanding that these products were not available for shipment until after the close of the quarter. The release of these two products bodes well for future quarters. The new Winmax control system, with 25 new features, will increase the competitiveness of all Hurco’s machine tools. The VMX84, with its ability to machine large parts, will open Hurco to a new group of customers.
Aside from the new products mentioned above, future quarters should continue to benefit from a weaker U.S. dollar and growing demand in Europe and Asia. While machine tool consumption has been on the decline in the U.S. since the IMTS last year, the most recent machine tool consumption report showed a nice rebound in March after several months of declines. For the full year, industry experts are looking for “steady growth” in the U.S. during 2007. Furthermore, the current quarter is likely to see some benefit from Eastec, a smaller regional U.S. trade show being held next week.
Bookings
If you think the lower sequential sales in the second quarter are a sign of a slowdown…think again. Order bookings increased 31.05% to $48.47 million from the year-ago quarter. If my history is correct, this was the fourth consecutive quarter of record bookings.
As I compare the consecutive quarter of record bookings to sales in the last couple of quarters (book-to-bill ratios), I am led to believe that bookings in the last couple quarter included orders for the VMX84 and the Winmax control system, which were not available for shipment until the current quarter.
Margins
Gross margins improved to 38.47% in the current quarter compared to 36.96% in the prior quarter and 35.75% in the year-ago quarter. Once again, I believe the 38.47% represents a record for Hurco. According to management, gross margins are largely driven by product mix and volume. Hurco’s continued improvement in gross margins demonstrates Hurco’s ability to focus on and compete with its higher margin products. The higher gross margins also demonstrate managements’ ability to manage costs. To this regard, Hurco management is expecting future margin improvement from the manufacturing facility in China.
Operating expenses as a percent of sales increased to 22.13% from 19.37% in the year-ago quarter. Operating expenses as a percent of sales were in the range of recent quarters but on the higher end of the range. Management attributed the higher operating expenses to incremental variable expenses related to market expansion, commissions and compensation expense. Considering Hurco’s recent expansion efforts in China and India, managements’ explanation is reasonable.
Higher gross margins for the quarter were offset by the higher operating expenses as a percent of sales resulting in relatively flat operating margins of 16.34%. Nonetheless, at 16.34%, operating margins were in the upper end of the recent range.
The increase in interest income offset somewhat by a higher tax rate in the quarter, resulted in higher net margins of 11.01% compared to 10.66% in the second quarter of 2006.
Future margin improvement can be expected once the sales and manufacturing operations in China become fully functional and sales in the region increase. Additionally, the VMX84 is likely a higher margin product. With the availability of the VMX84 in the current quarter, there will likely be continued improvement in gross margins.
Earnings
Earnings increased 19.11% from the year-ago quarter but slipped 13.25% sequentially for the reasons mentioned above. EPS for the quarter was $0.73 per diluted share putting the trailing 12-month EPS at $2.89 per diluted share. At a current price of $42.50, I calculate a trailing PE of 14.71. At the now higher price of $43.00 (share continue to rise during the day), I get am calculating an EV/EBITDA of 9.05.
Balance Sheet
Hurco is now free of long-term debt and the cash position increased over $2.1 million to $34.5 million or $5.40 per share. Hurco’s balance sheet remains exceptionally strong.
Cash Flow Statement
While a cash flow statement was not provided, it is reasonable to assume the $2.13 million increase in cash and the elimination of nearly $4 million in long-term debt was the result of another strong quarter of operational cash flows.
Looking Ahead to Next Quarter
I have put together my long-term argument for Hurco in previous blog posts (here). As for now, I will make a few positive bullet points for next quarter:
Expecting continued strength in Europe and Asia along with continued benefit from weaker U.S. dollar.
Expecting more of a rebound in U.S. machine tool consumption and I will be monitoring the U.S. Machine Tool Consumption Survey
Potential boost to U.S. sales as a result of Eastec
Higher book-to-bill ratios in recent quarters suggest some pent up orders for both Winmax and VMX84
Successive record bookings indicates that demand remains strong
Shipping of VMX84 and Winmax should result in continued margin improvement and will help expand customer base
Higher cash position and elimination of debt will result in higher net interest income
Slightly more favorable year-ago comparables
Conclusion
Despite the markets reaction today to missing estimates, Hurco once again reported a very solid quarter and the story remains the same. I continue to have faith in the long-term prospect for Hurco and at this point I am especially excited about the prospects for next quarter. Since I started writing, Hurco shares are already up a couple of dollars. Looks like smart investors are taking advantage of a discount.
Regards,
Tuff
Earnings Release
Tuesday, May 8, 2007
A Winmax for Hurco
If you are connecting to this blog entry from my message board post on 3/26/2008, please follow this link:
http://regulationfd.blogspot.com/2008/03/just-another-great-q.html
I insterted the wrong link on the message board. Sorry
In March, I wrote about Hurco Corporation ( "Hurco" or Ticker Symbol: HURC ), a designer and producer of machine tools. My original blog entry on Hurco can be found here.
Last week, I talked with Mr. John Oblazney, Hurco's CFO, and I have provided a summary of our discussion below. While I tried to quote Mr. Oblazney as much as possible, we had a very fluid conversation that didn't lend itself to taking detailed notes. As such, please assume that everything below is either paraphrased or my personal interpretation of his comments.
Is the Winmax control system currently available for shipment?
Yes. The Winmax control system began shipping in the last couple of days.
Were customers delaying orders at all in anticipation of the new control system?
No, not at all. It is a very easy upgrade for our customers to make. It takes about a half hour to load with a flash drive and the upgrade is good for one machine.
It was my sense from Mr. Oblazney that the cost of an upgrade is not or was not significant enough to deter clients from purchasing machines prior to the actual release of the Winmax Control System.
To what extent do you expect existing customers to upgrade their existing machine tools?
From my conversation with Mr. Oblazney, it sounded like Hurco is expecting a high level of upgrade activity. At the same time, Mr. Oblazney indicated that some customers may wait awhile before upgrading their machines with the new software. The decision by some customers to wait on upgrading their software would be typical of any software upgrade.
I did not get the sense that upgrades were going to be a big driver of revenues like I had previously anticipated. Nonetheless, Winmax should make Hurco tools more competitive in terms of new sales.
Is the Winmax something that can be used on non-Hurco machines?
The Winmax system is really for Hurco machines. I don't expect much if any use on non-Hurco machines.
As the Winmax Control System is primarily a software product do you expect to see a boost in margins?
No, not directly. Our margins in any given quarter are primarily driven by product mix. To the extent that the Winmax Control System makes our higher end products more competitive, it will help our margins.
In the past couple of quarters, sales have accelerated a bit. Can you say how much of that was attributable to the IMTS trade show?
Our sales are tied more to the release of new products than to the trade shows themselves. At the same time, the release of new products often times coincides with the various shows.
Aside from the Winmax Control System, did you recently release any new products?
Yes. Around the same time as Winmax, Hurco released a swivel head five-axis machine and a lathe with a live tooling add-on.
Since the IMTS, has Hurco participated in any other trade shows?
Yes. Mr. Oblazney specifically discussed Westec, a smaller U.S. trade show, and the Indian Machine Tool Exhibition that was mentioned in the last earnings release.
According to AMTDA's machine tool consumption survey, consumption activity has dropped off a bit in the U.S. since the spike that followed the IMTS. Is this indicative of the activity Hurco is seeing in the U.S.?
Yes. In the last earnings report, we indicated that there has been some softening in the U.S. So, yes....I think that report is reflective of the activity we see in the U.S.
Recent economic reports and machine tool reports indicate there has been continued strength in Europe. Would you say that is reflective of what Hurco is seeing in Europe?
Yes.
Aside from the AMTDA are there any other reports that I should be following?
The AMTDA report is a good report. I will refer to that report and we have people attend the AMTDA conferences. We also get information from Gartner publications. It sounds like you are looking in the right places.
I understand Hurco has a sales office in China and is now adding a manufacturing facility. Can you comment on Hurco's activity in China and the appointment of Philip James to the Board of Directors?
Mr. Oblazney talked about the sales office and the new manufacturing facility Hurco is developing in China. As mentioned in the 10K, the manufacturing facility will add capacity and lower manufacturing costs. John discussed how the facility will initially serve as support for the Taiwanese manufacturing operations but eventually machines designed for the Chinese market will be manufactured at Ningbo. He also mentioned that a new bridge is being built in Ningo that will provide much better access to the area. I believe the bridge will specifically provide better access to and from Shanghai.
Philip James was added to the Board because of his extensive experience in conducting business in the region. It was a strategic decision.
For the first time I saw India mentioned in your 10K filing, can you discuss Hurco's activities in India?
We are establishing a sales office in India. Setting up business in India is more difficult than in China and we are in the very early stages of establishing our presence in India.
Hurco has a sizeable cash position right now? Is the cash position there as a cushion for when there is a shift in the business cycle, or does Hurco have any specific plans for that cash?
A combination of both. We are looking at ways to employ our cash position to grow our business.
Are you talking about funding internal growth or are you referring to potential acquisitions?
Both. But, recently we made reference to acquisition opportunities in one of our filings. This was the first time we have mentioned anything about an acquisition in our filings.
My call with John went very well. He was very informative and more than willing to provide as much information that he could provide.
Regards,
Tuff
Hurco Companies, Inc. (Public, NASDAQ:HURC)
http://regulationfd.blogspot.com/2008/03/just-another-great-q.html
I insterted the wrong link on the message board. Sorry
In March, I wrote about Hurco Corporation ( "Hurco" or Ticker Symbol: HURC ), a designer and producer of machine tools. My original blog entry on Hurco can be found here.
Last week, I talked with Mr. John Oblazney, Hurco's CFO, and I have provided a summary of our discussion below. While I tried to quote Mr. Oblazney as much as possible, we had a very fluid conversation that didn't lend itself to taking detailed notes. As such, please assume that everything below is either paraphrased or my personal interpretation of his comments.
Is the Winmax control system currently available for shipment?
Yes. The Winmax control system began shipping in the last couple of days.
Were customers delaying orders at all in anticipation of the new control system?
No, not at all. It is a very easy upgrade for our customers to make. It takes about a half hour to load with a flash drive and the upgrade is good for one machine.
It was my sense from Mr. Oblazney that the cost of an upgrade is not or was not significant enough to deter clients from purchasing machines prior to the actual release of the Winmax Control System.
To what extent do you expect existing customers to upgrade their existing machine tools?
From my conversation with Mr. Oblazney, it sounded like Hurco is expecting a high level of upgrade activity. At the same time, Mr. Oblazney indicated that some customers may wait awhile before upgrading their machines with the new software. The decision by some customers to wait on upgrading their software would be typical of any software upgrade.
I did not get the sense that upgrades were going to be a big driver of revenues like I had previously anticipated. Nonetheless, Winmax should make Hurco tools more competitive in terms of new sales.
Is the Winmax something that can be used on non-Hurco machines?
The Winmax system is really for Hurco machines. I don't expect much if any use on non-Hurco machines.
As the Winmax Control System is primarily a software product do you expect to see a boost in margins?
No, not directly. Our margins in any given quarter are primarily driven by product mix. To the extent that the Winmax Control System makes our higher end products more competitive, it will help our margins.
In the past couple of quarters, sales have accelerated a bit. Can you say how much of that was attributable to the IMTS trade show?
Our sales are tied more to the release of new products than to the trade shows themselves. At the same time, the release of new products often times coincides with the various shows.
Aside from the Winmax Control System, did you recently release any new products?
Yes. Around the same time as Winmax, Hurco released a swivel head five-axis machine and a lathe with a live tooling add-on.
Since the IMTS, has Hurco participated in any other trade shows?
Yes. Mr. Oblazney specifically discussed Westec, a smaller U.S. trade show, and the Indian Machine Tool Exhibition that was mentioned in the last earnings release.
According to AMTDA's machine tool consumption survey, consumption activity has dropped off a bit in the U.S. since the spike that followed the IMTS. Is this indicative of the activity Hurco is seeing in the U.S.?
Yes. In the last earnings report, we indicated that there has been some softening in the U.S. So, yes....I think that report is reflective of the activity we see in the U.S.
Recent economic reports and machine tool reports indicate there has been continued strength in Europe. Would you say that is reflective of what Hurco is seeing in Europe?
Yes.
Aside from the AMTDA are there any other reports that I should be following?
The AMTDA report is a good report. I will refer to that report and we have people attend the AMTDA conferences. We also get information from Gartner publications. It sounds like you are looking in the right places.
I understand Hurco has a sales office in China and is now adding a manufacturing facility. Can you comment on Hurco's activity in China and the appointment of Philip James to the Board of Directors?
Mr. Oblazney talked about the sales office and the new manufacturing facility Hurco is developing in China. As mentioned in the 10K, the manufacturing facility will add capacity and lower manufacturing costs. John discussed how the facility will initially serve as support for the Taiwanese manufacturing operations but eventually machines designed for the Chinese market will be manufactured at Ningbo. He also mentioned that a new bridge is being built in Ningo that will provide much better access to the area. I believe the bridge will specifically provide better access to and from Shanghai.
Philip James was added to the Board because of his extensive experience in conducting business in the region. It was a strategic decision.
For the first time I saw India mentioned in your 10K filing, can you discuss Hurco's activities in India?
We are establishing a sales office in India. Setting up business in India is more difficult than in China and we are in the very early stages of establishing our presence in India.
Hurco has a sizeable cash position right now? Is the cash position there as a cushion for when there is a shift in the business cycle, or does Hurco have any specific plans for that cash?
A combination of both. We are looking at ways to employ our cash position to grow our business.
Are you talking about funding internal growth or are you referring to potential acquisitions?
Both. But, recently we made reference to acquisition opportunities in one of our filings. This was the first time we have mentioned anything about an acquisition in our filings.
My call with John went very well. He was very informative and more than willing to provide as much information that he could provide.
Regards,
Tuff
Hurco Companies, Inc. (Public, NASDAQ:HURC)
Monday, March 5, 2007
Time to Build the Watchlist
With the recent breakdown in global equity markets, now is the time to be building your watchlist and looking for bargains. Hurco Companies, Inc. (HURC) is one company investors should be adding to their watchlist.
Introduction
Hurco Companies, Inc. (Public, NASDAQ:HURC)
Hurco designs, manufactures, and sells computerized machine tools and related software. Hurco, founded in 1968, has been around the block a few times and was a pioneer in the application of microprocessor technology and conversational programming software on machine tools. While Hurc’s Computer Numeric Control (CNC) systems are proprietary, they use industry standard personal computer components. Hurco sells their products to independent job shops and short-run manufacturing operations within large corporations in the aerospace, defense, medical equipment, energy, transportation, and computer equipment industry. Hurco machine tools range in price from $40,000 and $300,000.
Sales
After suffering two years of declining sales in 2001 and 2002, Hurco’s sales have been chugging along nicely and the prospects for future growth remains positive.
Despite growing sales over the past four years, the rate of growth has been decelerating. I suspect this trend to shift in 2007 as a result of the accelerating demand in Europe, the introduction of a new product in the first half of 2007, the announced expansion projects in China and India, and the weakening of the U.S. dollar.
Accelerating European Demand
Huro’s sales are diversified across North America, Europe and Asia. Historically, Europe has accounted for the majority of sales. In fiscal year 2006, Europe accounted for 59% of sales versus 34% and 7% for North America and Asia, respectively. With the higher percentage of sales coming from Europe, a shift in European demand has a disproportionate affect on total sales.
Reflective of the disparity of economic growth between North America and Europe, sales growth in North America has outpaced Europe since Hurc’s turnaround in 2003. Recent economic data indicates economic growth is accelerating in Europe and moderating in the U.S. A continuation of this trend will result in a net benefit to Hurco. Early signs of this benefit were evident in Hurco’s first quarter of fiscal 2007. In the quarter, Hurco’s sales increased 47% over the year-ago quarter and management specifically attributed a portion of the increase to improved demand from Europe.
New Product Release
At the recent IMTS 2006, one of the largest industrial trade shows in the world, Hurco introduced five new products. The most exciting product introduced at the trade show was the WinMax Control System, which runs on a Windows based platform. Hurco expects the feature rich control system to maximize efficiency and productivity at job shops around the world by reducing setup time and improving surface finish. At the trade show, Hurco provided hands-on live demonstrations to customers that entered the booth and was very much encouraged by customer feedback.
"I was pleased to see how many customers embraced WinMax and quickly understood its value. For Hurco, WinMax will play a pivotal role in continuing to develop new technologies while taking advantage of trends in commercial technologies that enable our customers to realize measurable productivity gains," said Jim Fabris, President and COO of Hurco Companies, Inc.
The new Winmax Control System will span the entire Hurco product line of machining and turning centers. Winmax will be available in early 2007 and it will be sold as the standard control system on all machining and turning centers. Furthermore, it will be available as an upgrade to products sold within the last five years. Conceivably, Hurco software could be sold for use on non-Hurco machines.
The release of the Winmax Control System is big for Hurco. Lakshminarayana Ganti, an analyst with Thomas Weisel International, likened the significance of the release to Microsoft’s release of Vista (IBD article linked below).
Expanding Presence in China and India
In 2005, Hurco opened a permanent Technical Center in Shenzhen, China, a center for technology and manufacturing. The new location expanded on Hurco’s existing sales office in Shanghai. Hurco opened the Technical Center to serve as an application and service center for Hurco’s customers in China, the largest machine tool consumer in the world.
Recently, Hurco announced it is developing a manufacturing center in Ningbo, China. The Ningbo facility will expand Hurco’s manufacturing capacity beyond its existing manufacturing facility in Taiwan. The new facility will focus on machine castings and components but will have the capacity to be expanded to include sub-assembly operations. Eventually, machines designed specifically for China will be manufactured at the Ningbo facility.
China is the world’s largest machine tool market and grew 20% in 2006 to $12.9 billion. According to Gardner Publishing, worldwide output increased 10% in 2006 and one in every five machines produced went to China (See link to IBD article). Hurco’s expansion into China puts it in a solid position to benefit from the expected continuation of growth in Chinese demand for machine tools. While there are a number of domestic suppliers in China, domestic production is more focused on lower-end tools and not the more complex CNC machines made by Hurco.
Sales in Asia dipped a bit in the first quarter of fiscal 2007. Management attributed the sequential decline in sales to the timing of orders. As such, the second quarter is likely to receive a boost over the first quarter and the year-ago quarter.
In November of 2006, Hurco registered a distribution company in India and it is in the process of establishing a sales office. In its first quarter earnings release, Hurco also said that it participated in the Indian Machine Tool Exhibition 2007. To the best of my knowledge this was the first time Hurco participated in this show. According to management, Hurco’s powerful yet easy to use machine tools are an ideal fit in India where shop owners are faced with high employee turnover and an unskilled to semi-skilled work force.
Weakening U.S. Dollar
As the majority of Hurco sales are outside of the U.S. and paid in foreign currencies, fluctuations in exchange rates will have an impact on sales, which are reported in U.S. Dollars. A weaker U.S. Dollar relative to customers’ base currency, will inflate reported sales, and vice versa.
As of late, the dollar has been losing strength relative to other currencies in both Europe and Asia. Many economists and investors, including Warren Buffet, believe this trend will continue. Recent weakness in the Dollar accounted for 9% of the 47% increase in sales in the first quarter of fiscal 2007 compared to the year-ago quarter. At the Dollars current levels, the exchange rate will continue to have a favorable impact on year-over-year sales comparisons.
For all the reasons mentioned above, I believe Hurco’s sales growth will accelerate in 2007.
Margins
Gross margins and operating margins have been on the rise since Hurco’s turnaround in 2003.
In the most recent quarter, Hurco showed continued improvement with gross margins of 36.96%, operating margins of 17.22%, and pre-tax margins of 17.90%. From quarter-to-quarter margins tend to fluctuate mostly due to product mix but the overall trend is clearly positive.
The above table excludes net profit margin because 2006 was the first year the company was fully taxable. In prior years, Hurco was working through their operating loss carryforwards. As such, the pre-tax margin comparison is the best method of comparing year-over-year results. At a full tax rate, Hurco reported a net profit margin of 10.42% in 2006 and 11.51% in the first quarter of fiscal 2007.
As a software product, Hurco’s new WinMax Control System should boost margins further in 2007. Presumably, Hurco should be able to boost the cost of its existing products given the advanced software that will ship as a standard component on future shipments. Furthermore, upgrades to existing customers should come at a relatively low cost.
My expectation for higher sales spread out over Hurco’s fixed costs along with increased software sales, should lead to continued margin improvement in 2007. While the costs of raw materials have increased, I believe Hurco will continue to have the pricing power to pass these costs onto its customers.
Earnings/EPS
In 2006, Hurco reported earnings of $15.5 million or $2.42 per share compared to $16.4 million or $2.60 per share. When comparing year-over-year earnings, investors should keep in mind that Hurco did not become fully taxable until 2006. In fiscal year 2005, Hurco recorded a net tax benefit of $361,000 compared to a 2006 tax expense of over $7.6 million. Assuming a comparable tax rate in 2005, Hurco would have reported earnings of $10.8 million or $1.70 per share in 2005.
In the trailing twelve months, Hurco’s reported diluted earnings per share of $2.78. For the full-year 2007, analysts expect Hurco to report $3.22 per share for a 33% increase over the $2.42 per share reported in 2006. Furthermore, analysts expect Hurco to report $0.79 per share in the second quarter of fiscal 2007 compared to $.84 in the first quarter.
I am not sure why analysts are expecting a sequential decline in earnings. Perhaps analysts believe earnings will moderate a bit after the benefit of the IMTS trade show in the prior quarter. Another possibility is that analysts might be expecting customers to delay purchases until after the release of WinMax. Regardless, analysts clearly believe the company is poised for growth in the full-year. The current quarter ends on April 30. If Hurco releases WinMax early enough in the quarter, we may see analyst up their estimates for the quarter.
At a share price of $40, Hurco’s trades at a multiple 14.39x trailing earnings, 12.22x analysts’ 2007 earnings, and 10.50x analysts’ 2008 earnings.
Balance Sheet
Hurco has over $32 million in cash and roughly $3.8 million in long-term debt. Net cash per share totals $4.46. The company has $62 million in working capital and a long-term debt-to-equity ratio of 5%. Hurco’s solid balance sheet puts it in a strong position to weather a downturn.
Cash Flow Statement
As evidenced by the growing cash position, Hurco has not had a problem generating cash. More importantly, cash flows from operating activity have closely approximated earnings and cash flows from financing activity have been limited. In fact, Hurco has been paying down debt and has been restrained in issuing new shares. Over the last year, diluted shares outstanding have increased a modest 1.42%.
Management
Michael Doar was elected Chairman of the Board and CEO of Hurco in November, 2001. Previously, he was vice-president of sales and marketing of Ingersoll Contract Manufacturing, a subsidiary of Ingersoll International. Doar held various management positions with Ingersoll International beginning in 1989.
James D. Fabris was elected President and Chief Operating Officer on November 14, 2001. Mr. Fabris served as Executive Vice President of Operations from November 1997 until his current appointment and previously served as a Vice President of Hurco since February 1995.
John G. Oblazney was elected Vice President, Secretary, Treasurer and Chief Financial Officer in September 2006. Mr. Oblazney served as the Chief Financial Officer of Carrier Corporation's Light Commercial Business, a division of United Technologies Corporation, since December 2005. Prior to that, Mr. Oblazney served in various other financial positions with Carrier Corporation from 2000 to 2005. Prior to joining Carrier Corporation, Mr. Oblazney was employed for six years with Cooper Industries and employed three years by an international public accounting firm.
In his early years at Hurco, Doar managed the company through some tough times. He not only pulled Hurco through the storm, he positioned the company for better days ahead. Doar has been in the machine tool industry for a long time. He has done a commendable job at Hurco and has earned the trust and confidence of investors.
Competitors
Hurco competes with many companies in the U.S. and abroad. Most of Hurco’s competitors are larger and have greater financial resources. Hurco relies largely on its patented software (i.e. WinMax control software), proprietary features, and strong reputation to distinguish itself from its competitors.
Hurco lists several U.S. and international competitors in its 10k. While various research reports and investment websites identify a number of other competitors, these companies do not provide a reliable comparison for a number of reasons. Hardinge, Inc. (HRDG) is probably the best company for comparison purposes.
Despite Hurco’s superior margins, capital structure, and returns, Hurco trades at a slight PE discount to HDNG.
Ownership
Institutions hold 61% of Hurco’s total shares outstanding, or nearly $3.9 million shares of the $6.39 million shares outstanding. Last quarter, institutions were net sellers to the tune of 144,000 shares, which is seemingly insignificant in the broad scheme of things. Royce & Associates, an institution identified by Motley Fools as one to watch, is the largest institutional shareholder with 772,350 shares.
Yahoo and several other websites report insider ownership at around 20%. On March 1, 2007, Richard Niner, a Director, filed a Form 4 indicating he sold 500,000 shares. I suspect Yahoo and the other websites have not been updated to include this recent transaction. If this is the case, insiders now own roughly 13% of Hurco’s outstanding shares, which is still high for a non-founder run company. While the Niner sale is worth noting, I am not overly concerned at this point. From what I can tell, Niner is not a machine tool guy and he is still the largest natural shareholder with nearly 232,000 shares. I suspect Niner sold his shares to cash-in on a very nice gain and to further diversify his assets. I don’t believe his decision was based on his expectations for the company or the machine tool industry. Again, my opinion on this matter is purely speculative.
Other than the Niner transaction, there have been no other insider transactions of particular significance. Investors should watch for additional insider and/or institutional transaction over the next couple of months.
Conclusion
Since its turnaround in 2003, Hurco has enjoyed several years of impressive growth and share price appreciation. Furthermore, Hurco has expanded its product line, strengthened its balance sheet, and diversified its sales across a number of regions.
The biggest risk to Hurco’s future is a global economic slowdown. While the diversification of Hurco’s sales across various regions will reduce the negative impact of regional weakness, there is no hiding from a global slowdown. Despite the recent downturn in global equity markets, I believe the global economy is poised for continued growth. I agree with Mr. Bernanke that the U.S. will continue to see slower growth in the first half of 2007 but growth will accelerate in the second half of the year. I believe Asia, in particular China, will continue to grow at a rapid pace and Europe will continue to strengthen. In this scenario, Hurco will prosper.
With the current correction in equity markets, Hurco is a good stock to put on your watchlist. I would wait for things to shake-out in the market before taking a position. I am not sure the opportunity will present itself, but a buy in the $35 or $36 range would be nice.
For those looking for a technical take on HURC, downtowntrader promised he would give his view on HURC later tonight.
Disclosure
I am long Hurco since 2004 when it was introduced to me through the Motley Fools Hidden Gems Newsletter.
Source Documents
Hurco History from Hurco Website
Yahoo Key Statistics (HURC)
Yahoo Key Statistics (HDNG)
HURC Q1 Fiscal 2007 Earnings Release
HDNG Year-End and Q4 2006 Earnings Release
Latest 10K filing
Richard Niner Form 4
Yahoo Analyst Estimates
NASDAQ Holding Summary
Recent IBD Article
Wallstreet Journal Article from 2003 (Hurco low point)
Monthly Survey of Machine Tool Consumption (Note that U.S. consumption was positively impacted in September and October by the largest U.S. trade show)
Introduction
Hurco Companies, Inc. (Public, NASDAQ:HURC)
Hurco designs, manufactures, and sells computerized machine tools and related software. Hurco, founded in 1968, has been around the block a few times and was a pioneer in the application of microprocessor technology and conversational programming software on machine tools. While Hurc’s Computer Numeric Control (CNC) systems are proprietary, they use industry standard personal computer components. Hurco sells their products to independent job shops and short-run manufacturing operations within large corporations in the aerospace, defense, medical equipment, energy, transportation, and computer equipment industry. Hurco machine tools range in price from $40,000 and $300,000.
Sales
After suffering two years of declining sales in 2001 and 2002, Hurco’s sales have been chugging along nicely and the prospects for future growth remains positive.
Yearly Sales Growth
| Fiscal Year | Sales (in millions) | Growth over Prior Year |
| 2003 | $75.5 | 7.16% |
| 2004 | $99.6 | 31.83% |
| 2005 | $125.5 | 26.05% |
| 2006 | $148.5 | 18.33% |
| TTM (thru Jan 31) | $163.5 |
Despite growing sales over the past four years, the rate of growth has been decelerating. I suspect this trend to shift in 2007 as a result of the accelerating demand in Europe, the introduction of a new product in the first half of 2007, the announced expansion projects in China and India, and the weakening of the U.S. dollar.
Accelerating European Demand
Huro’s sales are diversified across North America, Europe and Asia. Historically, Europe has accounted for the majority of sales. In fiscal year 2006, Europe accounted for 59% of sales versus 34% and 7% for North America and Asia, respectively. With the higher percentage of sales coming from Europe, a shift in European demand has a disproportionate affect on total sales.
Reflective of the disparity of economic growth between North America and Europe, sales growth in North America has outpaced Europe since Hurc’s turnaround in 2003. Recent economic data indicates economic growth is accelerating in Europe and moderating in the U.S. A continuation of this trend will result in a net benefit to Hurco. Early signs of this benefit were evident in Hurco’s first quarter of fiscal 2007. In the quarter, Hurco’s sales increased 47% over the year-ago quarter and management specifically attributed a portion of the increase to improved demand from Europe.
New Product Release
At the recent IMTS 2006, one of the largest industrial trade shows in the world, Hurco introduced five new products. The most exciting product introduced at the trade show was the WinMax Control System, which runs on a Windows based platform. Hurco expects the feature rich control system to maximize efficiency and productivity at job shops around the world by reducing setup time and improving surface finish. At the trade show, Hurco provided hands-on live demonstrations to customers that entered the booth and was very much encouraged by customer feedback.
"I was pleased to see how many customers embraced WinMax and quickly understood its value. For Hurco, WinMax will play a pivotal role in continuing to develop new technologies while taking advantage of trends in commercial technologies that enable our customers to realize measurable productivity gains," said Jim Fabris, President and COO of Hurco Companies, Inc.
The new Winmax Control System will span the entire Hurco product line of machining and turning centers. Winmax will be available in early 2007 and it will be sold as the standard control system on all machining and turning centers. Furthermore, it will be available as an upgrade to products sold within the last five years. Conceivably, Hurco software could be sold for use on non-Hurco machines.
The release of the Winmax Control System is big for Hurco. Lakshminarayana Ganti, an analyst with Thomas Weisel International, likened the significance of the release to Microsoft’s release of Vista (IBD article linked below).
Expanding Presence in China and India
In 2005, Hurco opened a permanent Technical Center in Shenzhen, China, a center for technology and manufacturing. The new location expanded on Hurco’s existing sales office in Shanghai. Hurco opened the Technical Center to serve as an application and service center for Hurco’s customers in China, the largest machine tool consumer in the world.
Recently, Hurco announced it is developing a manufacturing center in Ningbo, China. The Ningbo facility will expand Hurco’s manufacturing capacity beyond its existing manufacturing facility in Taiwan. The new facility will focus on machine castings and components but will have the capacity to be expanded to include sub-assembly operations. Eventually, machines designed specifically for China will be manufactured at the Ningbo facility.
China is the world’s largest machine tool market and grew 20% in 2006 to $12.9 billion. According to Gardner Publishing, worldwide output increased 10% in 2006 and one in every five machines produced went to China (See link to IBD article). Hurco’s expansion into China puts it in a solid position to benefit from the expected continuation of growth in Chinese demand for machine tools. While there are a number of domestic suppliers in China, domestic production is more focused on lower-end tools and not the more complex CNC machines made by Hurco.
Sales in Asia dipped a bit in the first quarter of fiscal 2007. Management attributed the sequential decline in sales to the timing of orders. As such, the second quarter is likely to receive a boost over the first quarter and the year-ago quarter.
In November of 2006, Hurco registered a distribution company in India and it is in the process of establishing a sales office. In its first quarter earnings release, Hurco also said that it participated in the Indian Machine Tool Exhibition 2007. To the best of my knowledge this was the first time Hurco participated in this show. According to management, Hurco’s powerful yet easy to use machine tools are an ideal fit in India where shop owners are faced with high employee turnover and an unskilled to semi-skilled work force.
Weakening U.S. Dollar
As the majority of Hurco sales are outside of the U.S. and paid in foreign currencies, fluctuations in exchange rates will have an impact on sales, which are reported in U.S. Dollars. A weaker U.S. Dollar relative to customers’ base currency, will inflate reported sales, and vice versa.
As of late, the dollar has been losing strength relative to other currencies in both Europe and Asia. Many economists and investors, including Warren Buffet, believe this trend will continue. Recent weakness in the Dollar accounted for 9% of the 47% increase in sales in the first quarter of fiscal 2007 compared to the year-ago quarter. At the Dollars current levels, the exchange rate will continue to have a favorable impact on year-over-year sales comparisons.
For all the reasons mentioned above, I believe Hurco’s sales growth will accelerate in 2007.
Margins
Gross margins and operating margins have been on the rise since Hurco’s turnaround in 2003.
Recent Margin History
| 2003 | 2004 | 2005 | 2006 | |
| Gross Margins | 27.57% | 30.43% | 33.91% | 35.90% |
| Operating Margins | 2.91% | 8.47% | 13.15% | 15.24% |
| Pre-tax Margins | 1.88% | 7.60% | 12.81% | 15.56% |
In the most recent quarter, Hurco showed continued improvement with gross margins of 36.96%, operating margins of 17.22%, and pre-tax margins of 17.90%. From quarter-to-quarter margins tend to fluctuate mostly due to product mix but the overall trend is clearly positive.
The above table excludes net profit margin because 2006 was the first year the company was fully taxable. In prior years, Hurco was working through their operating loss carryforwards. As such, the pre-tax margin comparison is the best method of comparing year-over-year results. At a full tax rate, Hurco reported a net profit margin of 10.42% in 2006 and 11.51% in the first quarter of fiscal 2007.
As a software product, Hurco’s new WinMax Control System should boost margins further in 2007. Presumably, Hurco should be able to boost the cost of its existing products given the advanced software that will ship as a standard component on future shipments. Furthermore, upgrades to existing customers should come at a relatively low cost.
My expectation for higher sales spread out over Hurco’s fixed costs along with increased software sales, should lead to continued margin improvement in 2007. While the costs of raw materials have increased, I believe Hurco will continue to have the pricing power to pass these costs onto its customers.
Earnings/EPS
In 2006, Hurco reported earnings of $15.5 million or $2.42 per share compared to $16.4 million or $2.60 per share. When comparing year-over-year earnings, investors should keep in mind that Hurco did not become fully taxable until 2006. In fiscal year 2005, Hurco recorded a net tax benefit of $361,000 compared to a 2006 tax expense of over $7.6 million. Assuming a comparable tax rate in 2005, Hurco would have reported earnings of $10.8 million or $1.70 per share in 2005.
In the trailing twelve months, Hurco’s reported diluted earnings per share of $2.78. For the full-year 2007, analysts expect Hurco to report $3.22 per share for a 33% increase over the $2.42 per share reported in 2006. Furthermore, analysts expect Hurco to report $0.79 per share in the second quarter of fiscal 2007 compared to $.84 in the first quarter.
I am not sure why analysts are expecting a sequential decline in earnings. Perhaps analysts believe earnings will moderate a bit after the benefit of the IMTS trade show in the prior quarter. Another possibility is that analysts might be expecting customers to delay purchases until after the release of WinMax. Regardless, analysts clearly believe the company is poised for growth in the full-year. The current quarter ends on April 30. If Hurco releases WinMax early enough in the quarter, we may see analyst up their estimates for the quarter.
At a share price of $40, Hurco’s trades at a multiple 14.39x trailing earnings, 12.22x analysts’ 2007 earnings, and 10.50x analysts’ 2008 earnings.
Balance Sheet
Hurco has over $32 million in cash and roughly $3.8 million in long-term debt. Net cash per share totals $4.46. The company has $62 million in working capital and a long-term debt-to-equity ratio of 5%. Hurco’s solid balance sheet puts it in a strong position to weather a downturn.
Cash Flow Statement
As evidenced by the growing cash position, Hurco has not had a problem generating cash. More importantly, cash flows from operating activity have closely approximated earnings and cash flows from financing activity have been limited. In fact, Hurco has been paying down debt and has been restrained in issuing new shares. Over the last year, diluted shares outstanding have increased a modest 1.42%.
Management
Michael Doar was elected Chairman of the Board and CEO of Hurco in November, 2001. Previously, he was vice-president of sales and marketing of Ingersoll Contract Manufacturing, a subsidiary of Ingersoll International. Doar held various management positions with Ingersoll International beginning in 1989.
James D. Fabris was elected President and Chief Operating Officer on November 14, 2001. Mr. Fabris served as Executive Vice President of Operations from November 1997 until his current appointment and previously served as a Vice President of Hurco since February 1995.
John G. Oblazney was elected Vice President, Secretary, Treasurer and Chief Financial Officer in September 2006. Mr. Oblazney served as the Chief Financial Officer of Carrier Corporation's Light Commercial Business, a division of United Technologies Corporation, since December 2005. Prior to that, Mr. Oblazney served in various other financial positions with Carrier Corporation from 2000 to 2005. Prior to joining Carrier Corporation, Mr. Oblazney was employed for six years with Cooper Industries and employed three years by an international public accounting firm.
In his early years at Hurco, Doar managed the company through some tough times. He not only pulled Hurco through the storm, he positioned the company for better days ahead. Doar has been in the machine tool industry for a long time. He has done a commendable job at Hurco and has earned the trust and confidence of investors.
Competitors
Hurco competes with many companies in the U.S. and abroad. Most of Hurco’s competitors are larger and have greater financial resources. Hurco relies largely on its patented software (i.e. WinMax control software), proprietary features, and strong reputation to distinguish itself from its competitors.
Hurco lists several U.S. and international competitors in its 10k. While various research reports and investment websites identify a number of other competitors, these companies do not provide a reliable comparison for a number of reasons. Hardinge, Inc. (HRDG) is probably the best company for comparison purposes.
HURC Versus HDNG
Trailing 12 Month Comparison
| HDNG | HURC | |
| Sales | $326.6 million | $163.5 million |
| Gross Margins | 30.66% | 36.53% |
| Operating Margins | 7.07% | 15.95% |
| Net Margins | 4.27% | 10.91% |
| EPS Diluted | $1.58 | 2.78 |
| Share Price | $23.00 | $40.00 |
| PE | 14.56 | 14.39 |
| (Cash – LT Debt)/Share | ($6.93) | $4.46 |
| LT Debt-to-Equity | 43% | 5% |
| ROA | 4.57% | 14.92% |
| ROE | 9.24% | 24.50% |
Despite Hurco’s superior margins, capital structure, and returns, Hurco trades at a slight PE discount to HDNG.
Ownership
Institutions hold 61% of Hurco’s total shares outstanding, or nearly $3.9 million shares of the $6.39 million shares outstanding. Last quarter, institutions were net sellers to the tune of 144,000 shares, which is seemingly insignificant in the broad scheme of things. Royce & Associates, an institution identified by Motley Fools as one to watch, is the largest institutional shareholder with 772,350 shares.
Yahoo and several other websites report insider ownership at around 20%. On March 1, 2007, Richard Niner, a Director, filed a Form 4 indicating he sold 500,000 shares. I suspect Yahoo and the other websites have not been updated to include this recent transaction. If this is the case, insiders now own roughly 13% of Hurco’s outstanding shares, which is still high for a non-founder run company. While the Niner sale is worth noting, I am not overly concerned at this point. From what I can tell, Niner is not a machine tool guy and he is still the largest natural shareholder with nearly 232,000 shares. I suspect Niner sold his shares to cash-in on a very nice gain and to further diversify his assets. I don’t believe his decision was based on his expectations for the company or the machine tool industry. Again, my opinion on this matter is purely speculative.
Other than the Niner transaction, there have been no other insider transactions of particular significance. Investors should watch for additional insider and/or institutional transaction over the next couple of months.
Conclusion
Since its turnaround in 2003, Hurco has enjoyed several years of impressive growth and share price appreciation. Furthermore, Hurco has expanded its product line, strengthened its balance sheet, and diversified its sales across a number of regions.
The biggest risk to Hurco’s future is a global economic slowdown. While the diversification of Hurco’s sales across various regions will reduce the negative impact of regional weakness, there is no hiding from a global slowdown. Despite the recent downturn in global equity markets, I believe the global economy is poised for continued growth. I agree with Mr. Bernanke that the U.S. will continue to see slower growth in the first half of 2007 but growth will accelerate in the second half of the year. I believe Asia, in particular China, will continue to grow at a rapid pace and Europe will continue to strengthen. In this scenario, Hurco will prosper.
With the current correction in equity markets, Hurco is a good stock to put on your watchlist. I would wait for things to shake-out in the market before taking a position. I am not sure the opportunity will present itself, but a buy in the $35 or $36 range would be nice.
For those looking for a technical take on HURC, downtowntrader promised he would give his view on HURC later tonight.
Disclosure
I am long Hurco since 2004 when it was introduced to me through the Motley Fools Hidden Gems Newsletter.
Source Documents
Hurco History from Hurco Website
Yahoo Key Statistics (HURC)
Yahoo Key Statistics (HDNG)
HURC Q1 Fiscal 2007 Earnings Release
HDNG Year-End and Q4 2006 Earnings Release
Latest 10K filing
Richard Niner Form 4
Yahoo Analyst Estimates
NASDAQ Holding Summary
Recent IBD Article
Wallstreet Journal Article from 2003 (Hurco low point)
Monthly Survey of Machine Tool Consumption (Note that U.S. consumption was positively impacted in September and October by the largest U.S. trade show)
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