NASDAQ: HURC
Date 11-14-24
Price: 21.91
HURC trades below its liquidation (net current asset) value. It is closer to the bottom of its cycle than its top, with capable and shareholder aligned management taking steps to navigate the bottom of the cycle, taking steps to address customer needs and manage costs.
HURC’s latest 10-Q published on 2024-09-06 provides:
Basic Shares Outstanding
6,449,494
Current assets
$233,212,000
Total assets
$272,376,000
Current liabilities
$51,233,000
Noncurrent liabilities
$14,518,000
Inventory value:
$164,170,000 of which $111,750,000 is finished goods.
Tangible assets:
$264,502,000
Total Debt:
$12,526,000
Total Liabilities
$65,751,000
These numbers provide us with the following ratios:
Debt to tangible assets: 6%
Indicating that there is little bankruptcy risk in this company
Net current asset value: $25.45/share
Note: If you are more conservative in your valuation then after discounting inventory at 50% and accounts receivable at 75% we get to a net-net Working Capital of $11.04 /share.
Typically a stock trades less than its net current asset value when it is facing a large cash burn or share dilution. That is not the case here. The eps TTM was -$2.08, so they have a decent runway to stabilize profitability.
Background:
Hurco focuses on the design, manufacture, and sale of CNC machine tools primarily used in metal cutting. They target productivity improvements for clients in various manufacturing sectors, including aerospace, die and mold, and medical industries
Hurco’s products—CNC machine tools—are capital-intensive, and so their clients require substantial capex budgets to invest in new machinery. These budgets are constrained by economic conditions.
Hurco’s clients include a range of companies in the metal-cutting industry, in fields like aerospace, automotive, and medical. A significant portion of Hurco’s sales comes from small to medium-sized enterprises (SMEs), particularly shops that are sensitive to economic cycles and often face tighter cash flows and limited access to credit. These businesses are especially sensitive to factors like interest rates and financing availability. Thus the demand for CNC machine tools by these shops is highly cyclical.
Furthermore, when manufacturing utilization rates are high or there’s robust demand in sectors like aerospace, automotive, and medical, clients are more likely to allocate budgets for machinery upgrades or expansions.
Hurco has a short order backlog ~ 45 days, so it is difficult to estimate demand with any reasonable certainty. Making it difficult to smooth cash flows in volatile periods. When demand decreases, as seen recently, Hurco accumulates inventory, impacting cash flow.
To manage cash flow, Hurco has implemented cost reductions globally. These include reducing operational expenditures, optimizing inventory levels, and recently extending a share repurchase program to manage cash flow prudently while maintaining value for shareholders.
Towards The Bottom of It’s Market Cycle
The Purchasing Managers Index (PMI) for Manufacturing measures the buying rates of purchasing managers. It is an indirect measure of capex investment across the US manufacturing industry. It is at a cyclical low. This lower demand has been driving the decrease in Hurco’s earnings in the past 2 years. In cyclical industries, downturns eventually turn into upturns as we regress to the market’s average demand. The longer PMI remains low, the more pent up demand for purchases builds.
Hurco can weather the market until demand turns.
Management’s Prospects and Plans for Increased Cash Flows
In its filings, Hurco’s management has expressed cautious optimism for improved cash flows in coming quarters. Pointing to positive order growth in recent quarters, even as topline sales declined. Pointing to customer concerns, they are focused on technological advancements and product innovation, hoping these investments in new control systems and automation will bolster future cash flows. However, the firm reported a substantial net loss in the recent fiscal period, including a non-cash tax valuation allowance, which weighs on short-term cash flows.
Management Identifies 3 Challenges: Hurco faces several critical challenges:
- Cyclicality: There is cyclicality within their client’s industries which are influenced by consumer capex budgets and interest rates.
- Inventory and Operating Costs: Rising operating costs, inventory build-up, and fluctuating inventory demand affect profitability.
- Labor shortages: Manufacturing has been significantly affected by a shortage of skilled labor, especially in roles that operate complex CNC machinery. This labor shortage presents challenges in productivity for Hurco’s clients, which, in turn, impacts Hurco’s sales and demand for machinery.
And Offers Sensible Strategic Plans to Address These Challenges:
- Cost Control Measures: Global cost reductions and strategic inventory management are being implemented to counter economic headwinds and reduce operational overhead.
- Product Innovation and Market Expansion: Hurco is investing in innovative technologies, such as new control software and enhanced automation capabilities. Introducing new control technologies integrated with robotic systems, aiming to attract new customers and retain market relevance.
- Addressing Labor Shortages with Automation: Hurco has integrated automation solutions through its ProCobots line, which includes collaborative robots (“cobots”) designed to assist in machine operation without needing highly skilled labor. These cobots can perform tasks such as loading and unloading machines, allowing manufacturers to maintain productivity with a limited workforce. WinMax® software, was designed with this in mind. In August 2024, Hurco announced a strategic partnership with Kawasaki Robotics (USA), to provide accessible automation solutions without the need for complex robot programming.
Management Alignment with Shareholders:
The company has been buying back stock over the past 4 years. 350,000 shares repurchased since January 2020.
They recently extended their share repurchase program, which reflects management’s confidence in the long-term value and stability of the business. Influenced by the current undervaluation of shares.
The company also has a long history of dividends (recently discontinued)
Insider Ownership
Management has high inside ownership of the company with CEO Volovic Gregory S owning 76,651 shares, and there has been notable insider buying over the past 2 years.
| Trade Date | Insider Name | Title | Trade Type | Price | Qty | Owned |
| 2024-10-07 | Polar Asset Management Partners Inc. | 10% | S – Sale | $22.02 | -44,663 | 786,580 |
| 2024-07-11 | Wright Jonathon D. | GC, Corp Secretary | P – Purchase | $15.19 | +320 | 5,441 |
| 2024-07-11 | Jamison Haiquynh | Corporate Controller | P – Purchase | $15.24 | +645 | 5,195 |
| 2024-07-09 | McClelland Sonja K | CFO | P – Purchase | $15.32 | +1,950 | 81,266 |
| 2023-09-20 | Doar Michael | Exec COB | P – Purchase | $21.59 | +9,200 | 183,150 |
| 2023-09-18 | Porter Richard R. | Dir | S – Sale | $21.60 | -2,430 | 10,573 |
| 2023-09-18 | Wright Jonathon D. | GC, Corp Secretary | P – Purchase | $21.63 | +460 | 3,621 |
| 2023-09-15 | Volovic Gregory S | Pres, CEO | P – Purchase | $21.30 | +2,357 | 76,651 |
| 2023-09-15 | Jamison Haiquynh | Corporate Controller | P – Purchase | $21.27 | +461 | 3,627 |
| 2023-09-13 | McClelland Sonja K | CFO | P – Purchase | $20.95 | +1,420 | 67,937 |
Overall, I believe that the thesis for Hurco will playout over the next 2 years with a minimum 20% upside. As the market cycle turns, cost efficiencies are reflected in the bottom line and product innovations address customer pain points, we will see an increase in earnings and valuation of the HURC stock.
Leave a comment