Disclaimer: The views expressed here are mine and may change without notice. Past performance is not indicative of future results. All investments carry risk, including financial loss. This analysis is for educational purposes only and does not constitute investment advice or recommendations of any kind. Conduct your own research and seek professional advice before investing. Please see important disclaimers here and here.
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Value with better odds of success can take various forms — and Hurco Companies may be one such example.
Hurco manufactures Computer Numerical Control (CNC) machine tools for the metal-cutting industry under three primary brands: Milltronics (value-oriented customers), Hurco (productivity and profitability-focused), and Takumi (high-end machines). The company is vertically integrated, developing its own machines, software, and controls. Its customers include precision tool, die, and mold manufacturers, independent job shops, and specialized short-run production firms.
Despite a tangible book value of $195 million, including $44 million in net cash, Hurco’s market capitalization stands at just $116 million, about 40% discount to book value. This depressed valuation reflects soft industry conditions. The machine tools sector is highly cyclical, with demand that can change abruptly.
Beyond the low valuation, several factors increase the margin of safety. The company has suspended its dividend and is instead repurchasing shares — a clear sign of management’s confidence and a value-accretive use of capital when shares trade below intrinsic value.
Hurco also maintains a debt-free balance sheet, an important strength in a cyclical industry. Additionally, the company owns its 165,000-square-foot Indianapolis headquarters, carried on the books at historical cost. Based on comparable nearby listings, the property could be worth over $15 million, suggesting tangible book value is understated.
That said, the investment is not without its challenges. Hurco is losing money in the current down cycle due to lower volumes and product price reductions. Still, a solid cash position and management’s proactive actions (reducing working capital and cutting costs) are helping to preserve financial strength. Management has also been personally purchasing shares, signaling their view that the stock is undervalued.
Risks include a large portion of cash held overseas and manufacturing operations located primarily outside the U.S., which introduce geopolitical and currency uncertainties. Furthermore, the company’s returns on capital (Table I) are below my ideal levels, likely a result of high fixed costs and intense competition.
Table I
(in USD thousands)
Source: Company filings, and my calculations
Over the business cycle (2018 peak to 2024 trough), the company's average profit margin has been about 4%. On roughly $250 million normalized revenue, this implies about $10 million operating profit — a 14% yield on an enterprise value of $72 million ($116 million market cap less $44 million in cash). And, on peak $30 million profit, the enterprise value is just 2.5 times the operating profit (40%+ yield). Hurco's valuation is attractive (Table II), trading at the lowest Price to Book multiple of its entire peer group, despite having one of the best balance sheet.
Table II
(in USD millions)
Source: Yahoo Finance, and my calculations
In summary, while Hurco may not be a top-tier franchise, its depressed valuation, strong balance sheet, and shareholder-friendly management offer a margin of safety. For patient investors, owning a basket of such undervalued, asset-backed cyclicals can yield favorable outcomes over time.
Ultimately, my goal is to find value with better odds of success—purchases made with downside protection and upside potential. Hurco appears to fit that description.
Abhay Srivastava is the Founder and Managing Member of AS Investment Partners LLC, a value investing firm (www.asinvpartners.com).
Abhay can be reached at abhay@asinvpartners.com
