Vision machine company Cognex Corporation (NASDAQ: CGNX ) has had a great run over the last two years, with its stock price up more than 84%, and the move reflects its strong operating performance. Moreover, other companies with exposure to factory automation spending like Rockwell Automation (NYSE: ROK ) and ABB Ltd. (NYSE: ABB ) are seeing some positive signs, so does it all add up to make Cognex a buy?
Cognex offers good growth prospects
Essentially, Cognex's main growth drivers come from four main sources, all of which are seeing the company expand its total addressable market, or TAM. For those that don't know the company well, Cognex provides machine vision solutions that monitor automated manufacturing processes.
- Further expanding sales into the logistics market, which management believes is a $250 million addressable market
- Diversifying its end-markets into new industry verticals
- Benefitting from the increasing usage of automation in emerging market manufacturing processes
- Driving the increase usage of machine vision in automation worldwide
While the attractive thing about these profit drivers is that Cognex's TAM will expand with all of them, they are still somewhat dependent on cyclical investment in the manufacturing industry. In other words, don't think you are buying a stock whose growth prospects aren't tied to the global manufacturing sector.
On the other hand, Cognex continues to demonstrate that it can grow significantly in excess of the industrial sector, and the recent first quarter results were indicative of this capability.
Cognex reports a strong first quarter
The recent earnings report saw revenue increase 12% to $90.9 million; toward the top of its previous guidance of $88 million-$91 million. Moreover, gross margin increased to 77% from 76% last year, and operating margin was up 3% to 25% -- demonstrating that Cognex is able to leverage revenue increases into margin expansion.
Meanwhile, evidence demonstrating that the objectives (discussed above) are being achieved came from the signing of a $40 million factory automation deal in Asia. In addition, a $3 million logistics order described as coming from "a well-known retailer". Looking ahead to the second quarter, Cognex's management forecasts $101 million-$105 million in revenue (growth of 19% at the midpoint), but expects operating expenses to grow by 15% as costs increase to support the $40 million order -- revenues from which will not start to be recognized until the third quarter.
In short, Cognex is achieving most of its objectives, but there is a cause for concern. Focusing on its key factory automation segment (83% of revenue in the quarter), the Americas region grew the fastest while Europe's growth was described as "strong" with particular strength in food and beverage and consumer products. However, Asia (ex-Japan) factory automation revenue "declined year-on-year due to the timing of large project". It's possible that this partly to do with the timing of the Chinese New Year, but it's hard not to be concerned that it's more evidence of slowing growth in the Far East.
What the industry is saying
Cognex's competes in a fragmented market, with its key competitors being companies like Keyence, Sick, and Datalogic. However, its solutions are still dependent on the kind of spending conditions that affect ABB Ltd. and Rockwell Automation. The good news is that the latter companies are seeing some strengthening conditions. For example, Rockwell Automation recently increased its estimate for full-year organic revenue growth by 0.5% to 3.5%-6.5%.
ABB Ltd's discrete automation and motion segment (servicing general industry and discrete manufacturing) generated a 14% increase in orders in its recent first quarter. In fact, ABB Ltd. is doing well with its earlier cycle sales; its problem areas are in late-cycle industries, power, and mining.
Where next for Cognex?
All told, the industry backdrop -- at least according to ABB Ltd. and Rockwell Automation -- looks positive for Cognex, and the company continues to deliver on its long-term objectives. With that said, emerging markets are clearly a concern and Cognex remains a cyclical play on the global economy. Moreover, a forward P/E ratio of more than 29 times forward earnings doesn't make the stock look particularly cheap right now. It's a stock for the economic bulls. and for those considering adding to the risk end of their portfolios.
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