Heating, ventilation, and air conditioning (HVAC) company AAON (NASDAQ:AAON), bioprocess engineering products company Repligen (NASDAQ:RGEN), and machine vision company Cognex (NASDAQ:CGNX) are vastly different companies. But they have one thing in common: They're all highly attractive strategic assets operating within growth industries. Let's take a look at why they could be a good fit for larger companies looking to make acquisitions.
The HVAC industry has seen a remarkable amount of restructuring in recent years, and the leading U.S. players are all better placed to start consolidating. Where Johnson Controls (NYSE:JCI), Trane Technologies (NYSE:TT), and Carrier (NYSE:CARR) were previously part of much larger industrial companies, they've now been freed in order to focus on their core HVAC market.
Johnson Controls spun off its automotive interiors business, Adient, in 2016, and then sold its automotive battery business in 2019, with part of the rationale being to focus on HVAC. Meanwhile, Trane Technologies was created when the former Ingersoll Rand company merged its industrial business with Gardner Denver . Carrier was spun out of the former United Technologies in 2020.
Lennox International (NYSE:LII) is sometimes seen as a potential target because of its focus on the U.S. residential market, but I think high-end commercial HVAC play AAON is potentially a better option. The market cap won't deter a potential bidder, and given the company's focus on the premium end of the commercial HVAC market, it's likely to offer a potential acquirer an immediate opportunity to expand into new markets without cannibalizing existing sales.
While AAON is definitely not the cheapest industrial stock on the market, or even in its sector, recent events have highlighted the potential for the company if it was part of a larger company. For example, recent investment in new sheet metal fabrication machines had the effect of shortening the time AAON takes to manufacture equipment. As such, if AAON is to be part of a larger company, it could receive substantive future investment in order to enhance productivity. That's an idea that could attract bidders.
The case for a Repligen takeout comes from the idea that it's a nichecompany in a fast-growing and consolidating market. Bioprocessing relates to the cultivation and purification of cells for use in the production of pharmaceuticals, foods, and chemicals. It's a process usually split into upstream bioprocessing (cell isolation and cultivation) and downstream bioprocessing (separation, filtration, and purification).
There are four major players in the market, with Merck's MilliporeSigma offering upstream and downstream equipment. Sartorius is best known for its downstream (filtration) equipment solutions, and ThermoFisher for its upstream (cell cultivation) equipment. Meanwhile, Danaher (NYSE:DHR) has recently become a bioprocessing industry leader through the addition of GE biopharma (largely upstream solutions) to its strength in downstream (membranes and filtration) equipment.
All of this leaves Repligen as a small player surrounded by some very large neighbors in a consolidating market.
Repligen competes with these companies and also counts the biopharma unit that Danaher bought from General Electric and MilliporeSigma as major customers. The company is known for its strength in downstream equipment solutions (filtration and a leading position in areas of chromatography), and its acquisition would immediately lead to an increase in equipment market share for an existing bioprocess leader or a new entrant into the industry. Repligen has good sales momentum in 2020, so don't be surprised if its peers are running the slide rule over it right now.
It's been a difficult couple of years for this machine vision company. Like many companies with exposure to automation, its traditional core markets are automotive and consumer electronics (in Cognex's case, smartphone production). Unfortunately, both end markets have been weak in 2019 and 2020, and Cognex's revenue growth has stuttered accordingly.
That said, automotive production is set to bounce in 2021, while smartphone sales/production will bounce and also be supported by 5G rollouts. Meanwhile, Cognex continues to grow its logistics sales -- driven by e-commerce warehousing -- and its other end markets, like packaging, food, and pharmaceuticals, remain strong.
In addition, the automation market is seen as being a major beneficiary of the movement toward reshoring manufacturing in the U.S. In order to be cost-competitive, manufacturers will have to look at automating production.
As such, Cognex's leading position in machine vision could attract a lot of interest from some of the far larger companies that play in the robotics and automation market, such as Siemens, ABB, Rockwell Automation, or Schneider.