Perhaps it's better to talk of a "second" or "double" reopening class of stocks? The economy did open up in 2021, and growth came back stronger than many expected, but it also brought raw-material cost increases and supply chain issues that hit specific industries. That said, history suggests that commodity price increases will diminish in the future. In this context, machine vision company Cognex (CGNX 1.54%), paint and coatings company PPG Industries (PPG -0.68%), and industrial software company PTC (PTC 0.23%) could have a great 2022. Here's why.
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Cognex Corporation
The leading machine vision company has three major end markets: automotive, consumer electronics, and logistics. Cognex's automotive and logistics end markets had a good year in 2021, driven by spending on automotive production lines (including electric vehicles) and e-commerce logistics.
However, the consumer electronics end market (smartphone manufacturing) had a challenging year. Customers paused spending after a surge in demand for products in 2020, all part and parcel of the usual lumpiness in spending in consumer electronics.
In addition, there was margin pressure in logistics as Cognex made a conscious decision to allocate extra resources to a key customer in expectation of future orders. It all added up to a disappointing year for the company.
There are three main reasons why Cognex could have a strong 2022:
- Logistics orders remain strong, and the critical (undisclosed) customer may place more orders. In any case, the costs of the extra services in 2021 are likely to be one-time charges.
- The recovery in automotive production in 2022 and the ongoing investment in electric vehicles should spur more capital spending in the industry.
- Consumer electronics spending is always lumpy and follows product development, so customers may ramp up spending again next year, particularly as the semiconductor shortage should abate.
All told, investors have every reason to believe that Cognex will have a much better year in 2022.
PPG Industries
The 19% rise in year-over-year sales in PPG's third quarter is somewhat of a false guide to its overall 2021. In reality, the increase comprised 13% growth from acquisitions, 6% from higher sales prices, and 2% from favorable currency movements. However, sales volumes fell 2%.
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It's the latter that should concern investors. Indeed, in its third-quarter earnings presentation, management published data on its sales volumes compared to full-year 2019 volumes. Data breakout shows that most of PPG's sales volumes (60% of the total) were up on 2019 volumes. However, the problematic end markets (automotive original equipment manufacturer, automotive refinish, and aerospace, representing 40% of sales volumes) are down a mid-teens percentage compared to 2019 volumes.
The case for PPG being a reopening play rests on the belief that all three of the problematic end markets will recover in 2022. First, the automotive refinish market will improve as miles driven in the economy improves -- something that usually follows on from economic growth. Second, automotive production will bounce as the semiconductor shortage abates through 2022. Third, the major airplane manufacturers, such as Boeing and Airbus aim to ramp up their narrowbody airplane production. The two companies dominate the airplane market and narrowbody aircraft make up the overwhelming majority of commercial aircraft.
These markets all matter, because PPG is the global leader in aerospace coatings and automotive original equipment and no.2 in automotive refinish.
As such, Wall Street analysts have PPG's sales growing by double-digits in 2022, with operating profit rising 24%. PPG's end markets should be firing on all cylinders by the end of the year.
PTC -- a good year that could have been better
Investors in industrial software company PTC probably expected a bit more out of the company in 2021. The industrial sector bounced back more robust than many expected it would, and those sorts of conditions usually result in upside surprise to companies that supply it. That's the case even more for a company like PTC that sells emerging technology at the cutting edge of the fourth industrial revolution.
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PTC's core products are its computer-aided design (CAD) and product lifecycle management (PLM) software. Still, the excitement around the company centers on its growth products, namely the Internet of Things (IoT) and augmented reality (AR) solutions. Unfortunately, by management's admission, growth in PTC's growth products (mainly IoT right now) hasn't quite lived up to expectations in its fiscal 2021, even if overall company growth was at the high end of the company's initial guidance for the year. It all adds up to a slightly disappointing year for the company.
That said, it's hard not to think that some customer spending was delayed due to the supply chain and logistics difficulties suffered by many industrial companies in the current environment. As such, PTC will likely benefit from these issues receding in 2022. If so, the company could surprise on the upside the way it was supposed to in 2021.
