Schafer: Insiders, outsiders alike keep faith in Hutch Tech

Hutchinson Technology just reported another quarterly loss, but at least a couple of the analysts still following the company's stock currently rate Hutchinson shares a buy.

One of them, Christian Schwab of Craig-Hallum Capital, is optimistic even though he's posted an earnings per share estimate of exactly $0.00 for the fiscal year ending in September 2016.

Meeting that modest EPS estimate wouldn't do much for most companies, but here it would be something of an achievement. Unless the company bought the winning Powerball ticket, 2016 would be the first fiscal year since 2007 that didn't end with a loss.

That kind of losing record often leads an activist shareholder to push a company in a new direction, but that's not the case here. The shareholders just easily re-elected Chairman Wayne Fortun, the former longtime CEO. The current CEO, Rick Penn, has been in the top job for only a couple of years, but he's no outsider, having worked there since 1981.

That means this $260 million in sales public company has been mostly left alone for years to find solutions to its own problems.

This is not to suggest that the board and management should have been ousted. The guess here is that if any activist had a solid idea of what could have been done to make this company consistently profitable over the last few years, that plan would have surfaced by now.

Penn certainly seems optimistic. In an e-mail, he said, "we are linked better than ever with our suspension customers and are confident that, as a result, we can grow market share and volume in our core business and return to profitability. We believe we now have a fundamental technology and cost edge over our competitors."

With an average selling price in the most recent quarter of 58 cents, however, building lots of this small, high-precision part seems easier than making money at it.

For years the annual report the company filed with the Securities and Exchange Commission had this same sentence on its list of "risk factors" investors should consider: "Almost all of our sales depend on the disk-drive industry, which is cyclical, subject to ongoing technological innovation and subject to intense price competition."

Other than that, building suspension assemblies can be a fantastic business.

The company has had good years, of course, and 10 years ago the stock traded above $40 per share, vs. the recent close at $3.61 per share.

It built its products here at home, too, at its own buildings in Minnesota as well as a facility in Eau Claire, Wis., and another large plant in Sioux Falls, S.D.

Had a new board and CEO been installed then, it's unclear what different choices they would have made. The company had very few good options, and maybe just the one: cut costs enough to make money on far lower sales volumes, but don't cut so much that the current customers flee.

The first domestic plant to go was in South Dakota, as the company started building products in Thailand. It was both cheaper to operate there as well as far closer to the customers' own manufacturing sites in Asia.

Analyst Mark Miller of Noble Financial noticed some of this hard work and started following the company in May 2010. In reviewing the many research updates he has published since then, it looks like rock bottom was reached in late 2010.

The worst of the recession was behind the company, and it had already reduced costs, but sales and margins both declined in the September 2010 quarter. Miller figured that sales in the core business building disk-drive suspension assemblies would have to grow by a nearly a third just to let the company break even.

He put out a note to clients under the headline "Extended Losses Seen Well into Fiscal 2012, Sell!"

A year later, however, Miller had once again taken a more positive view. As he put it then, "a number of favorable trends are seen pushing the firm toward profitability" early in 2014.

Oops, too optimistic again. Hutchinson Technology lost money in each of the four quarters of calendar 2014.

"It's not been a straight line up, I'll put it that way," Miller said this week, of Hutchinson's long journey back to profitability.

But this week he remains at a buy rating. The company is a far more efficient manufacturer than it was, he said, plus it's gaining market share. "They only had an operating loss last quarter of less than $1 million," he said. "That's certainly better than what we've seen."

Miller and Schwab have each noted that there's more to tell investors about than just Hutchinson's traditional business, too, as Hutchinson Tech has been working to build sales volume for a component used in optical image stabilizers on smartphone cameras.

And that brings up one of the most interesting aspects of the art of investing. Losses, even eight or nine years of them, won't matter to shareholders once they look ahead and start to see consistent profits to be made.

And if the company gets to where it makes money consistently, it will have gotten there on its own.