Based on their current price-to-earnings (P/E) ratios, shares in industrial conglomerate Honeywell (HON -0.19%), industrial software company PTC (PTC -0.64%), and machine vision company Cognex (CGNX -1.03%) are not cheap -- they all trade over 25 times current earnings.
However, despite near-term headwinds, all three have excellent long-term prospects and can deliver solid returns for investors in the coming years. As a result, investors might consider buying these stocks during the current market malaise.
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1. Honeywell International
The industrial conglomerate has plenty of growth prospects that will drive earnings growth for many years to come. Honeywell is continually preparing for growth from significant investments in quantum computing and sustainable technologies (renewable fuels, carbon capture, advanced plastics recycling, and renewable energy storage). For example, CEO Darius Adamczyk expects Honeywell's majority-owned quantum computing company, Quantinuum, will hit sales of $2 billion by 2026 with the sustainable technologies businesses hitting $700 million by 2024.
Meanwhile, Honeywell has growth prospects across all its four existing segments. Aerospace will recover in line with a recovery in commercial flight travel. Honeywell Building Technologies is a leading player in the move toward smart connected buildings that allow building owners to increase efficiency and cut carbon emissions while ensuring a healthy environment for occupants. The performance materials and technologies segment is a leading player in process automation (notably life sciences) and advanced materials used in sustainable technologies. Finally, the safety and productivity solutions (SPS) segment has a business (Intelligrated) in e-commerce warehouse automation.
Another SPS business offers sensing technologies used in Internet of Things (IoT) applications. Finally, the productivity solutions (scanners, barcode readers, etc.) bit of SPS help workers (logistics, retail) capture data to improve workforce productivity.
All told, Honeywell's management recently upgraded its long-term sales growth target to 4% to 7% a year from 3% to 5%, reflecting its growth potential. With much of the new growth likely to come from higher-margin software and services, it's understandable that management also hiked its long-term margin growth expectations. As such, Honeywell deserves a premium rating in the market.
2. PTC
The industrial software company recently upgraded its fiscal 2022 growth expectations -- a rare event in a difficult period for the economy. That said, there's little doubt it faces near-term headwinds. For example, suppose its customers suffer the ill effects of soaring raw materials prices and supply chain difficulties (obtaining components and moving them around). As a result, they will feel pressure to cut back on development and production in the near term, hurting sales of PTC's core products in computer-aided design (CAD) and product lifecycle management (PLM).
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That's something to look for this year. However, longer term, the company's growth prospects look assured. The CAD and PLM products should benefit from growth in digitization and management's decision to accelerate CAD and PLM products to the cloud.
In addition, the fast-growing "growth products" associated with the IoT and augmented reality (AR) will take over the growth baton in time. Through IoT, customers can connect their physical assets to the digital world and gather, analyze, and utilize a mass of data for the latter to improve the performance of the former. Meanwhile, AR allows customers to overlay digital information on physical equipment (think tablets scanning over complex machinery with diagrams) to improve servicing.
PTC's sales and cash flow should accelerate strongly in the coming years, and the stock is a great way to play the "fourth industrial revolution" investing theme.
3. Cognex
The machine vision company's last earnings report wasn't pretty. Unfortunately, its core automotive and consumer electronics customers suffer from a well-documented shortage of semiconductors and other vital components. The conflict in Ukraine and COVID-19 lockdowns in China have only exacerbated these problems. For example, automotive production estimates have been cut, partly due to the inability to secure copper wiring harnesses manufactured in Ukraine.
Cognex's management acknowledges that its growth is slowing in 2022 and is the reason for the slump in the share price. Still, its automotive, consumer electronics, and logistics customers will need to spend on automation and, ultimately, machine vision solutions in the future. Moreover, the COVID-19 pandemic has only highlighted the importance of using machine vision for visual inspections instead of relying on workers. In addition, the company's orders tend to be very lumpy anyway.
Everything points to Cognex making a recovery at some point, and the recent dip is an exciting entry point into a compelling long-term growth story.
