CAPS All-Star tenmiles decided to give Hardinge (HDNG) the thumbs-up just last week, citing a "Market sell-off in Hardinge [that] creates attractive long term value proposition for this maker of computer controlled machines. I own their competitor HURC in the real world which offers a stronger balance sheet, but this one works for CAPS at 10% below book value."
What caused the sell-off? Fellow-All Star M2R2H informs us that the stock was "punished by Wall Street for not meeting expectations even though they had a 35% increase in [sequential] profit."
But perhaps the most informative comment comes from a neighbor. All-Star CAPS player amckane confides: "This company is headquartered near my home village in upstate NY. It is moving much of its business overseas where desperately poor people will work for a fraction of what the locals will work for here. This is also where the business is, as manufacturing facilities are increasingly located in places like China, and, well, China ... did I mention China?"
Yes, you did, amckane -- and thanks very much. So basically, what we have here is a U.S.-owned and operated manufacturer that's not only taking full advantage of the global trend toward outsourcing, but also putting itself "in the face" of potential buyers of its products. Sounds like smart business to me.
And the fact that Hardinge operates in the same sphere of business that's been so kind to Hurco (HURC) -- a Motley Fool Hidden Gems "watch list" stock that's gained more than 50% in the last 12 months -- sounds pretty good, too. Tie all this up with the bow of a single-digit P/E, plus 30% projected annual profits growth, and Hardinge looks too good to be true.
So what's the catch? You know, they say that every investment has at least one thing wrong with it -- and that's true of Hardinge. In this case, the catch is that despite "earning" more than $21 million over the last 12 months, as earnings are calculated under GAAP, the firm generated no free cash flow whatsoever. In fact, it incurred a cash loss of about $0.1 million.
Meaning that while the bull case for Hardinge is pretty obvious, the picture is actually a little fuzzy.
~ Rich Smith, "Contrarian Shopping List," Motley Fool, November 20, 2007