Machine-vision company Cognex Corporation (NASDAQ:CGNX), roofing and insulation company Owens Corning (NYSE:OC), and industrial tools company Stanley Black & Decker (NYSE:SWK) have all seen sharp increases in their stock prices in 2017. So is now the time to cash in some gains? Let's look at what's happened with all three and consider why there may be more to come from them in 2017.
Cognex Corporation is in growth mode
Investors began the year hoping that a combination of recovering U.S. industrial production growth and the potential for take-up of Cognex's products in sectors such as consumer electronics and logistics would lead to outperformance. Fast-forward to the second quarter, and that's exactly what happened.
As readers already know, factory automation revenue in the U.S has created a strong recovery for Cognex, while the promise that large consumer-electronics and logistics orders will turn to revenue in the second half has led analysts scurrying to increase earnings estimates. Meanwhile, Cognex's traditional core strength, the automotive industry, saw better-than-expected sales in the second quarter.
So far, so good in 2017, but I would strike a couple of notes of caution. First, the results and outlook from automotive-related companies such as BorgWarner show that automotive production growth will slow later in the year. Second, back in 2015, management was expecting large orders in the second half, but they failed to materialize, partly because of the macroeconomic environment.
Cognex isn't immune from the economy, so keep an eye out for any slowing in automotive and/or general industrial conditions. Otherwise, its secular growth drivers -- the increasing use of machine vision in automation -- put it in good stead.
Despite the rise in its stock price, Owens Corning looks to be favorably priced on a historical basis.
Of course, this may not turn out to be the case for the roofing, insulation, and composites company if the housing market peaks. New house builds and home sales are determinants of roofing and, to a lesser extent, insulation demand. While these metrics can bounce around a bit, they remain in a long-term uptrend, and according to Owens Corning CEO Mike Thaman on the first-quarter earnings release, "All three businesses are executing on our priorities, and we are well positioned to achieve another year of strong performance."
On the first-quarter earnings call, management didn't announce an adjustment of the full-year outlook, but it hinted at potential improvement in the composites segment and confirmed expectations for a strong rebound in insulation margin. That's led analysts to raise full-year EPS estimates in the past few months from $3.86 to $4.01 for 2017 and from $4.33 to $4.45 for 2018, putting the stock on a forward P/E ratio of 16.1 and 14.6 times earnings for 2017 and 2018, respectively. Provided you think the housing market will remain in a long-term uptrend, Owens Corning still looks a good value. Here's a more in-depth case for buying the stock.
Stanley Black & Decker
Following a strong first quarter, management raised its full-year EPS guidance range from $7.08-$7.28 to $6.98-$7.18 while continuing to expect full-year organic revenue growth of 4%. However, the story with Stanley Black & Decker isn't just about the near term. In fact, the company has been on a long march toward releasing the value in its product portfolio through making structural improvements in its operations.
As previously outlined, management has made some pretty impressive improvements in working capital in recent years and restructured the company for growth. Moreover, in the company's investor day presentation in May, management laid out some pretty impressive long-term targets:
- 4%-6% organic revenue growth.
- 10%-12% EPS growth.
- Free cash flow conversion from net income of 100% or above.
That's impressive for a company trading at a forward P/E ratio of 19.1 times earnings. Provided the construction markets hold up, Stanley Black & Decker still looks to be a good value.
The bottom line
Cognex trades at a forward P/E ratio of 42 and needs to continue its impressive growth trajectory to justify such a rating. Meanwhile, Owens Corning continues to look like a good value, provided the housing market remains in growth mode. Finally, Stanley Black & Decker is now in good shape, and if management delivers on its plans, its stock, too, appears to be a value.