The volatility in the marketplace right now is enough to scare off even the most seasoned of investors, but for those looking for an entry point into a long-term holding, it might make sense to start looking at some names. In this context, industrial software company PTC, aerospace composite technology company Hexcel, and machine vision company Cognex are worth a look. Here's why.

A man standing in front of a buy and sell signal.

Image source: Getty Images.

Key earnings drivers

To be clear, all three face significant end market headwinds in 2020 -- don't be surprised if they all lower full-year guidance -- but if you can stomach the near-term risk and take a very long-term view, then the long-term growth drivers of these stocks might make them attractive for you. I've put the key long-term opportunity and near-term risk in the table below.

Company 

Market Cap

Long-Term Earnings Driver

Near-Term Risk

PTC (NASDAQ:PTC)

$5.7 billion

Industrial companies' adoption of digitization

Industrial companies could cut spending in the face of declining demand due to the effects of COVID-19

Cognex (NASDAQ:CGNX)

$7.8 billion

Widescale adoption of machine vision technology across automated production and logistics

Automotive and consumer electronics are key end markets, and both started 2020 in bad shape

Hexcel (NYSE:HXL)

$2.6 billion

Increase penetration of advanced composite technology on newer aircraft

The commercial airline industry is set to report substantially lower than previously expected revenue in 2020 due to COVID-19, and this is likely to lead to airplane order cancellations.

Data source: Author's analysis

PTC

The industrial software company has big plans for the future, with management estimating that its free cash flow (FCF) will be in the range of $700 million to $900 million in 2024 -- assuming a range of outcomes starting with "recession" and ending in "optimist." To put these figures into context, adjusted FCF was just $245 million in 2019. In other words, even in a recessionary scenario, management sees PTC trading at 8.1 times its FCF in 2024, and as low as 6.3 times based on an optimistic economic scenario.

To get there, management plans to grow its annual recurring revenue (ARR) significantly in its Internet of Things (IoT) and augmented reality (AR) solutions, alongside high-single-digit growth in its traditional computer-aided design (CAD) solutions and its product lifecycle management (PLM) software.

Activity

2019 ARR

2024 ARR

Compounded Annual Growth Rate

Computer-aided design

$5.1 billion

$7.5 billion

8%

Internet of things

$2 billion

$6.5 billion

26%

Augmented reality

$0.5 billion

$5 billion

60%

Product lifecycle management

$1.9 billion

$2.7 billion

7%

Data source: PTC presentations. ARR is annual recurring revenue. 

At the heart of its plans lies the assumption that companies will adopt digital solutions in the industrial enterprise in order to better manage their physical assets.  AR helps companies overlay digital information -- garnered from IoT applications -- onto physical assets. Meanwhile, PLM helps companies better monitor and manage those assets over their lifecycle using insights and analytics coming from web-enabled devices (IoT).

In essence, PTC is a play on the so-called fourth industrial revolution, which emphasis the use of IoT alongside software-- something that could lead to revenue growth for many years to come.

Cognex Corporation

It's not raining for Cognex right now, it's pouring. The company's key end markets -- making up nearly 50% of its revenue in recent years -- are the automotive and consumer electronics industries. Unfortunately, both industries started 2020 in bad shape, and that's even before the novel coronavirus hit the economy. Suffice it to say that many companies will be considering cutting their production plans and therefore capital outlays in this environment -- potentially bad news for Cognex's machine vision systems.

That said, the company still has strong long-term growth prospects. If industrial companies are going to continue adopting automation and robotics in the factory environment, then they are going to need machine vision to monitor, measure, guide, and control the processes -- where Cognex comes in. Moreover, management sees a big opportunity to expand sales into new industries such as logistics (driven by e-commerce warehousing), life sciences, and food and beverage. 

There's certainly some near-term cyclical weakness around the stock, but over the long term, Cognex still has good growth prospects.

Hexcel

Earnings assumptions for aerospace suppliers like Hexcel in 2020 need to be thrown out the window -- not least because the International Air Transport Association (IATA) has already lowered its expectations for airline revenue in 2020. For example, the model given at the end of February suggested a $29.3 billion hit to global airline revenue in 2020, but just a few weeks later (as it became clear the novel coronavirus effects had internationalized) the IATA sees it as something closer to $66 billion to $113 billion. For reference, total commercial airline revenue was around $870 billion in 2019. 

As such, airlines are already cutting routes and will come under pressure to cut orders, and that's the last thing that an original equipment manufacturer like Hexcel wants to hear -- there's very little aftermarket for composite materials.

With the bad news out of the way, it's important to remember that the COVID-19 outbreak is likely to be contained at some point, and there's no reason why commercial passenger traffic can't bounce back as it did after SARS.

If orders do bounce back, they are likely to come in newer aircraft like the Airbus A320 NEO, and hopefully the Boeing 737 MAX -- aircraft that contain significantly more composites (in dollar terms) than the legacy versions of the aircraft. Moreover, if the replacement cycle for wide-body aircraft kicks in -- driven by the new Boeing 777X -- then Hexcel could be set to benefit. Wide-body aircraft contain significantly more composite technology due to greater need for weight reduction. The long-term secular trends favor Hexcel, even if significant headwinds persist in the near-term.