This week’s Hot Stock is an industrial technology company. Industrial companies are not often operating on the cutting edge; rather, they normally provide goods, equipment, or services used in construction and manufacturing. This week’s Hot Stock crosses over this normal definition, and starts to resemble a technology company by providing machines to highly specialized industries, making it difficult to value correctly. This blending of lines between technology and industrial also allows this company to serve many diverse markets. This diversification, along with the company’s strong fundamentals and undervaluation earn this stock our Attractive rating. This week’s hot stock is Hurco Companies (HURC).

Hurco Companies designs, manufactures, and sells computerized machine tools mostly for companies in the metal cutting industry. These products consist of numerous cutting devices such as computer numeric control (CNC) milling machines and high speed machining products. Hurco also provides hardware accessories and replacement parts for its machine product lines, as well as training services for its customers. Hurco provides these devices to companies that make products for a plethora of industries, ranging from aerospace to medical equipment to automobile makers.

Promising Fundamentals

Overall, Hurco’s revenue in 2014 was impressive and increased 15% year over year. Operating income also grew 61%, due to Hurco’s effective cost management. This positive growth continued into this year when Hurco released its first quarter earnings. While revenue remained flat year over year in 1Q15, costs were further reigned in and 1Q15’s operating income grew 84% year over year. This revenue growth in 2014 and efficiency improvements into this year have allowed Hurco to grow its after-tax profit (NOPAT) by 55% in 2014 and 82% on a trailing twelve-month (TTM) basis. Over the last five years, profits have grown from a -$3 million loss in 2009, to $18 million on a TTM basis.

The company’s return on invested capital (ROIC) was 11% in 2014, up from 8% the year before. Hurco also has $15 million in TTM free cash flow and only $12 million in total debt. A strong balance sheet and cash flow allows this company flexibility through all business cycles.

Eye on the Future

As mentioned earlier, Hurco is expanding outside of the box of traditional industrial companies. With its mill machines’ ability to produce any number of products, parts, or pieces, the uses can be endless. Hurco realizes this as well, and is currently building a device that can turn a regular mill into a 3-D printing device. While we’re waiting to see the results of this particular innovation, this type of cutting-edge technology could continue growing Hurco’s core business at even greater levels than as in the past.

Hurco’s stock price is relatively flat on the year despite the positive 1Q15 results. At its current price of ~$34/share, HURC has a price to economic book value (PEBV) ratio of 1.0. This ratio implies that the market expects Hurco to never meaningfully grow NOPAT over the remaining life of its business. For a company that has been around for nearly 50 years, never growing profits again seems highly unlikely, especially when considering the company’s recent history.

If Hurco can grow NOPAT by just 9% compounded annually for the next ten years, the stock is worth $41/share –– a 21% upside.

Disclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, style, or theme.

Photo Credit: Andy Malmin (Flickr)

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