Hurco Companies Stock: Buying On A Confirmed Swing (NASDAQ:HURC)

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Intro

If we look at a long-term chart of Hurco Companies, Inc. (NASDAQ:HURC) (Metal Cutting Industry), we can see that shares appear to be undergoing a symmetrical triangle for well over a decade now. These patterns usually play themselves out as continuation patterns and merely represent a pause in the pattern we had up until the formation started (Bullish pattern from 2003 to 2007). We have in play the four reversal points which is the minimum requirement for a symmetrical triangle, but what is interesting at present is the fact that shares of Hurco look set to test the lower trend-line of the triangle over the near term (Potential buying opportunity). Suffice it to say, shareholders, who remain long this play will be hoping that shares can successfully test that support line in due course.

From our standpoint, the attraction in Hurco is the actual height of the triangle in question. Since the symmetrical triangle is a combination of both price and time, there always is a time limit in these patterns as we approach the apex. Therefore, if indeed we eventually break out to the upside, the minimum long-term target would be the sum of the breakout share price plus the actual height of the triangle. Therefore, to see if the above is a realistic target, let’s go through the company’s profitability metrics, the valuation as well as company dividend.

Hurco Technical Chart

Symmetrical Triangle In Hurco (StockCharts.com)

Profitability

Followers of our work will be aware that we favor companies that have the capacity to generate strong cash flow even in no-growth environments. Over the past four quarters, Hurco has generated approximately $20 million of free cash flow on a net profit tally of roughly $9 million. Therefore, even after taking forex headwinds into account, approximately $8 million was added to the balance sheet cash balance after capital for dividends and share repurchases were allocated over the past four quarters including the second quarter. This is exactly the trend we like to see when a company is trading close to long-term support given that Hurco has a clean balance sheet with $232 million of shareholder equity at the end of the company’s latest second quarter and no interest-bearing debt to speak of.

Working off a solid financial foundation in this industry is really all that one can ask of Hurco in the present environment. The reason being is that demand for the company’s products can change significantly during times of economic uncertainty. The typical order backlog runs just over a month which does not give companies such as Hurco the possibility to pivot quickly. Capex spending, for example, has taken a significant hit over the past few years as the pandemic and associated lockdowns disrupted trading conditions. Cash and inventory are the two biggest line items in Hurco’s asset section, so knowing when to acquire (invest) is a very difficult proposition in the present environment.

Value

This is why in investing, the risk/reward profiles of stocks change continuously and why we believe Hurco’s potential reward at present may be more attractive than going long the stock at this juncture (risk). We state this because shares currently are trading with an ultra-low book multiple of 0.7 and a corresponding sales multiple of 0.6. The stock’s trailing free-cash-flow yield comes in at 12.5% and Hurco’s price-to-cash-flow ratio comes in at 7.2. Suffice it to say, even if long-term support was to fail over the near term, this stock is cheap and would attract deep value investors especially considering the company’s balance sheet and dividend which we will get into next.

Dividend

Management on the 10th of this month declared a quarterly dividend of $0.15 which will be paid out next month. This means the forward dividend yield comes in at 2.46%. The cash dividend payout ratio comes in at 17.7% which means free cash flow is easily covering the payments at this point. Ever since the dividend was reintroduced in 2013, we have witnessed strong growth with the payout having grown from $0.05 per share per quarter to the present $0.15 per share per quarter. Suffice it to say, as long as earnings can at least be stable over the near term, we see no issue with the dividend where there remains a large runway for continued growth in the payout.

Conclusion

Given Hurco’s lack of forward-looking guidance with respect to its sales, it is difficult to estimate where Hurco will be trading, for example, in 12 months’ time. What we do know is that the company continues to generate strong cash flow, has no debt, and shares are coming up against long-term support. We may look to get long in here on a convincing swing low. We look forward to continued coverage.

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