Many technology companies promise growth in the distant future, but Cognex (NASDAQ: CGNX) is starting to deliver on its potential right now. The company is the world leader in machine vision systems used in capturing and analyzing data from automated manufacturing processes. With the stock up over 52% in the last year, it's time for investors to look at more closely at this growth play.
Cognex starts to deliver
Every assembly line manufacturer or logistics operation needs to monitor production processes thoroughly, and Cognex's machine vision systems offer the ideal answer to this problem.Its systems help to ensure assembly line quality control and, insure that the plant is working at optimal efficiency. Cognex's growth opportunity is to increase penetration of its systems within manufacturers' processing plants.
In addition, the company has been trying to expand out of its core end-markets like automotive, and into less cyclical verticals like pharmaceuticals, logistics, beverages, and food. The good news is that its largest core end market (automotive makes up around 25% of its factory automation business) is doing relatively well this year. Furthermore, Cognex is starting to see some large orders coming in from its targeted growth areas like logistics and emerging markets.
Logistics and emerging markets
The company has long looked at the logistics market as a potential growth area, and its latest second-quarter results came with the announcement of a large order from a major logistics firm, such as UPS or FedEx. In previous conference calls, Cognex's management was keen to highlight that the logistics companies tend to take time to assess new technologies. However, the latest conference call saw company officials take a more bullish tone:
"The customer we reported winning the large order from is one of many significant customers we expect to have in that market. I would say it was the first breakthrough, but we expect more orders from that customer but perhaps, more importantly, from other large players in that market to come over the next quarters"
Cognex has discussed logistics as being a $250 million market opportunity, and any orders here will obviously help to generate interest in the broader $1 billion ID-products market that encompasses sectors like retailing and packaging. To put this into context, Cognex's revenues for 2012 were around $324 million.
With the global manufacturing center of gravity shifting toward emerging markets, regions like China are going to become increasingly important for companies selling industrial solutions. Indeed, within its key factory automation segment (78% of revenues), Cognex reported that $10 million (or nearly 15%) came from China. With its factory automation sales to China growing at 41% in the quarter, it's fair to assume that China's contribution will get bigger in future quarters.
Is it macro?
As ever, investors will want to assess whether Cognex's strength is due to macro factors or some specific industry or company strength. One of its key competitors, Danaher (NYSE: DHR), also reported good numbers in its product ID sales. In its latest second quarter results (delivered in mid-July) Danaher reported its product identification revenues were up mid-single digits with sales rising in all its key regions. That's pretty good growth given that Danaher's overall sales were only up 2.5%, and it suggests that this segment of manufacturing is capable of growing faster than the market.
Given the connection between the two companies (Cognex's current CEO was formerly a VP of Danaher's product identification business) and Danaher's highly acquisitive nature, it's not hard to view Cognex as a potential target for its much larger competitor.
Where next for Cognex?
Cognex's excellent execution hasn't gone unnoticed by the market, and its valuation is now looking high.
Looking ahead, the analyst consensus is for $1.98 in EPS for 2014. With the current price around $56, this would put Cognex on a forward P/E ratio of around 28. The chart above suggests this is a fair value for the stock, so it's hard to argue that the stock is a raging buy.
Cognex certainly has the capability to generate upside surprise (new logistics deals, expanding sales in new sectors, etc.), but you will need to assume this in order to see the stock as undervalued right now. This is a high quality company, but investors need to watch it closely for earnings upgrades and/or a better entry point.