Hurco: Navigating Elevated Uncertainty And A Short-Cycle Slowdown
Liuhsihsiang A lot of short-cycle industrials have held up relatively well in recent months, with investors apparently more confident that whatever slowdown may be on the way will be relatively brief and not all that severe. Time will tell if that’s true (I’m more bearish), but in the meantime machine tool manufacturer Hurco (NASDAQ: HURC ) is navigating through a downcycle without a lot of visibility. Relative to my last update on the shares, the stock has been outperforming the broader industrial space, but lagging metalworking companies like Kennametal ( KMT ) and Lincoln Electric ( LECO ), and the post-earnings reaction has since pushed the shares down slightly relative to the broader group since my last update. Fiscal first quarter results were basically on target with my model, so I’m not changing much at this point. I do expect Hurco to be a beneficiary of ongoing reshoring and nearshoring trends, but I also do expect to see weaker spending for industrial capex in 2023 and possibly into 2024. I expect long-term core revenue growth to largely match underlying GDP and industrial production growth, and the shares do seem to offer a decent return from here, but they remain illiquid and vulnerable to eroding end-market demand through 2023. Weaker Results Relative To A Still-Healthy Industrial Sector As I note in almost every Hurco piece, it’s well worth remembering that this is a small industrial company that largely serves other small industrial (mostly manufacturing) companies with largely higher-spec products. In practical terms, that tends to separate the company from larger macro trends at least to some degree – Hurco isn’t counter-cyclical or acyclical, but it doesn’t follow the group in lock step. That heterogenicity showed up again in fiscal first quarter results with numbers that were meaningfully weaker than what most industrial companies have reported, and management acknowledged both the elevated volatility and elevated “lack of visibility” (for lack of a more elegant phrase) in the business right now. Revenue declined 18% year over year as reported (and 14% quarter over quarter) and 13% in constant currency terms in a quarter where the average industrial announced around 10% year-over-year growth and relatively few companies posted year-over-year declines. Revenue performance in North America and Europe were relatively similar, down 8% year-over-year in constant currency, while the sequential declines were 15% and 11%, respectively. I find this a bit curious given that most management commentaries on the quarter cited weaker results/demand in Europe relative to the U.S., but again refer above to my comment about how in the short term Hurco can zig while others zag. Results in Asia were quite weak, with revenue down 48% yoy in constant currency and down 25% qoq in reported terms. Gross margin declined two points from the year-ago period and 440bp qoq, with the business likely hit in part by mix, but also by reduced overhead absorption on lower volumes. Operating income was down 77% year over year, with operating margin down 550bp to 2.3% (and down about two points qoq). More Pain On The Way Orders declined by 20% yoy in constant currency terms and 9% qoq. While many industrials have started to report weaker order trends, this is a bigger drop than what has been typical in the industrial group. Orders from North American customers declined 11% yoy and 18% qoq, while EU orders fell 20% and 8% and Asia-Pacific orders fell 51% and 45%. Hurco ended the quarter with a 0.97x book to bill versus 0.92x in the prior quarter, and 1.06x in the year-ago quarter, including a 1.05x book to bill in Europe (versus 0.86x in FQ4’22) and 0.90x book-to-bill in North America (versus 0.93x in the prior quarter). I do believe there could be another quarter or two of sequential weakness before an upturn, and that’s assuming that I don’t need to fundamentally revisit my expectations for industrial capex in FY’23 and FY’24. I expect the U.S. PMI to worsen from here, and trends like manufacturing sales to decline further – Fastenal ( FAST ) reported that February manufacturing sales were up 15.8% yoy after 17% growth in January and 13.4% growth in December. I also expect weaker trends in Europe, as economies (and major Hurco markets) like Germany seem to be ahead of the U.S. in seeing a slowdown. I’d also note that companies that sell to machine tool manufacturers (including ABB ( ABB ), Fanuc ( OTCPK:FANUY ), and Yaskawa ( OTCPK:YASKY )) have reported weaker trends of […]
