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Hurco Companies Inc.

Hurco Companies, Inc., based in Indianapolis with manufacturing facilities in Michigan, England and West Germany, is a manufacturer and marketer of numerically controlled machine tools. Following five years of losses, the company posted a small profit in 1987. Foreign sales are about 38 percent of revenues.

Hurco, incorporated in 1968, has been a pioneer in the innovation and application of microprocessor technology to specialized machine tools, controls and accessories. While characterized as a machine-tool manufacturer, management would prefer to be viewed as an applications software company applying metal-working expertise to CAD/CAM (computer aided design and manufacturing). In 1987, the company negotiated a marketing agreement with Deckel AG of West Germany to market and service most of Deckel's machine-tool products in the United States.

The company's return to profitability can be attributed to four factors: 1. The decline in the U.S. dollar, which has made Hurco machine tools price-competitive with Japanese product. 2. Voluntary trade restraints, which have limited the supply of units from Japan and Taiwan. 3. Increased unit volume in OEM business and parts. 4. Corporate restructuring, which reduced Hurco's non-union work force from about 650 in 1984 to 389 year-end 1987. Sales per employee have risen from $60,000 in 1983 to a projected $140,000 in 1988.

Hurco is one of a handful of independent machine-tool companies remaining. We consider the company an attractive acquisition target. We urge investors to maintain tight stops and to monitor sales backlogs and demand closely.

Hurco competes in the computer numerically controlled (CNC) segment of the fragmented machine-tool industry. In the March quarter of 1988, total orders for machine tools in the United States rose 83 percent over 1987. The lower dollar vs. the yen has made U.S. machines price-competitive again. In addition, strong export demand has caused many users to retool. Industry sources note that one-third of machine tools currently in use in the United States are more than 20 years old.

Hurco's proprietary technology

The machine-tool industry has been plagued with R&D costs of marrying computer technology to complex metal-cutting operations and custom-designed systems. Hurco's success with "Ultimax," which incorporates controls and operator displays in ordinary English, ease in programming, twin screen display and other unique features, demonstrates the advantages new CNC machines provide. High tolerances can be obtained with Hurco equipment by relatively unskilled workers and the machines provide interface with CAD/CAM equipment.

Less-cyclical sales

Hurco has been the strongest stock in our Indiana index in 1988. The stockprice appreciation reflects several factors including return to profitability and strong demand. The major risk associated with Hurco is whether management can be successful in mitigating the inherent cyclicality of the machine-tool business. Hurco has 10,000 active customers consisting of tool and die shops, custom job shops and other small operators who need to integrate with an off-line CAD system. The key to this is open-architecture software integrating various CNC machines.

Institutional holders and venture capital firms hold more than 60 percent of Hurco common stock, limiting float. These investors believe that Hurco's proprietary technology is very attractive and do not discount acquisition offers inthe future by a Deckel or a Siemens. Sales volume is expected to remain high through at least mid-1989. Parts and service revenues are about 20 percent of sales and margins are expected to improve in 1989.
U.S. Machine Tools 28.00 59
European 17.90 38
Interest and Other 1.5 3
 30.3 $ (1.96) .00 1983
 43.2 (1.82) .00 1984
 44.5 (5.55) .00 1985
 43.4 (0.66) .00 1986
 47.4 0.10 .00 1987
Fanuc 10,677 57
Hurco 2,000 11
Allen Bradley 1,875 10
Cincinnati Milacron 1,375 7
Siemens 1,205 6
All others 1,703 9

Research by Raymond H. Diggle, Jr., C.F.A. Director of Research, Raffensperger, Hughes & Co.
COPYRIGHT 1988 Curtis Magazine Group, Inc.
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Title Annotation:Investment Indiana
Author:Diggle, Raymond H., Jr.
Publication:Indiana Business Magazine
Date:Oct 1, 1988
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Next Article:Indiana's market researchers.

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