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Hurco, Revisited
Board: Hurco Companies, Inc.

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By deadcat2
July 11, 2007

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It was about 7 months ago I bought HURC and since that time, it's become a doubler for me. Some of you who were posting back then had bought in even earlier so I imagine you're sitting on a tidy 4-bagger or so. Anyway, with the recent runup in price, it seemed time to take another look at Hurco to determine whether I should be taking some profits off the table, hold my position, or even buy more.

First, looking at the 10Q that was filed back in early June, it appears that Hurco is firing on all cylinders. The real growth for Hurco seems to be in Europe. Both the quarter and the six month sales as a percent of the total were 67% for Europe. In the most recent three months, Hurco experienced an increase in sales in Europe of 30%, and 50% for the 6 month period. North American sales were down 8% while Asian sales were up 2% qoq. Exchange rates boosted the increase for Europe, accounting for 12% of the increase over the previous year's quarter, a significant figure that should be kept in mind when looking at earnings growth. When looking at sales by product category, the largest increase is in machine tools rather than service fees and parts, a good indication for growth in the fundamental business. As more machines are sold to clients, service fees and parts should also increase, although at a slower rate. Most importantly, it looks like the market has heartily embraced the next generation of Hurco machine tools at the higher price points than the older machines.

Last year when I posted, there was a lot of uncertainty regarding HURC. Only one analyst covered them (I think there are now two), and that analyst was projecting a 5 year growth rate of 4% with a resultant PEG of over 2.5. At the time that didn't make sense to me since qoq earnings growth was in the neighborhood of 16%. The margin of safety seemed great enough that I took the plunge, though not with a full position. The months that followed continued to be cloudy, or I would have added to my position. Perfect hindsight, of course, has caused me to bruise myself from the self inflicted kicking :-)

What a difference a few months can make! That same analyst is now projecting a 5 year growth rate of 27% with a PEG of .57. My own assessment yields somewhat different numbers, but still very respectable. 2007 eps should be around $3.18 (up considerably from earlier estimates last year of $2.76), an increase of 31% over 2006. 2008 eps is pegged at $3.82, another increase of 20%. Of course this demonstrated performance has now doubled the single digit ttm p/e from last year to about 19 now. Looking at growth for this year or next, however, still gives a PEG ratio of below 1.

My own back of the envelope calculations give me the following: 2008 eps of $3.82 x p/e of 20 = $76.40. From today's closing price of $54.09, that's an increase of a little over 41% over the next 18 months. Music to my portfolio! I figure that a buy under $59 will yield at least a 20% CAGR, the target appreciation I always look for.

Of course HURC is not without its risks. There are those that would point to the cyclicality of the sector and while that may be true for North America, it appears that in Europe and Asia - Hurco's predominant market - it's on the upswing. Exchange rates could reverse, though I don't see the dollar gaining serious ground on the Euro, and Hurco seems fairly savvy with their currency hedge. And then there's just the perturbations of a small cap that can drive one to distraction.

My own assessment still suggests there's value in Hurco and even though its price has more than doubled over the past year, there's still room for this one to make some nice gains from here. The outlook for earnings is good, cash flows have been good, debt is negligible and the p/e is not unreasonable. The margin of safety may be a bit more slim than it was at half the price, but I think there's more clarity to the future potential for this small cap.

Regards,
Derek


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