Semiconductor companies are known to be early cyclical businesses, and since there's no chip company bigger than third-party foundry Taiwan Semiconductor Manufacturing (TSM 1.26%), it makes sense to follow its financials and end-market commentary closely. That's why the $586 billion market cap company's latest earning report meant so much to the market.
Moreover, I think that report spells great news for two companies that might not be immediately apparent to investors -- machine vision company Cognex (CGNX 2.06%) and automation company Emerson Electric (EMR 0.27%).
Taiwan Semiconductor cheers the market
When manufacturers and technology companies anticipate improving sales, the first thing they do is start to prepare to ramp up their production by ordering chips. That's why semiconductor companies are such good early indicators of the turning of the economic cycle.
While these dynamics are typical, they have been subject to a concertina effect. Sales of consumer electronics soared during the pandemic's lockdowns, only to be followed by a glut of products -- and, in turn, chips -- as demand corrected after social distancing measures eased. That's why Taiwan Semiconductor's revenue declined 8.7% in 2023. However, management's outlook for 2024 calls for low to mid 20% revenue growth in dollar terms. Moreover, CFO Wendell Huang told investors that "our revenue remains well on track to grow" at a compound annual rate of 15% to 20% "over the next several years in U.S. dollar terms."
In addition, management expects the semiconductor market (excluding memory) to grow by 10% in 2024, with semiconductor foundries growing at 20%.
As CEO C.C. Wei noted on the call, "geopolitical uncertainties persist, potentially further weighing on consumer sentiment and the market demand," so don't expect too much too soon. However, he also noted that the sharp inventory correction of 2023 had led to the company's business bottoming out "on a year-over-year basis, and we expect 2024 to be a healthy growth year for TSMC."
What all this means for Cognex
If this translates into a pick up in infrastructure investment among consumer electronics companies -- and not least, smartphone manufacturers -- that would be excellent news for machine vision company Cognex. The company suffered an extremely challenging 2023 as ongoing interest rate increases pressured its consumer electronics and automotive customers, while its logistics (e-commerce warehousing) market corrected after a few years of torrid growth.
There are still obvious near-term pressures, and Cognex is unlikely to report any noteworthy improvements when it next delivers quarterly results. Still, there are signs of a recovery in progress. For example, Honeywell's management told investors that orders for its warehouse automation business, Honeywell Intelligrated, rose by a double-digit percentage year over year in the third quarter, and gained 50% sequentially.
Similarly, Germany's KION reported 42% year-over-year growth in its supply chain solutions (warehouse automation) business in 2023's third quarter.
Growth in orders from technology integrators like Intelligrated and KION will likely result in higher demand for machine vision solutions in time.
Meanwhile, if 2024 does feature a recovery in consumer electronics investing and smartphones (leading market forecasters expect the smartphone market to grow by about 5% in 2024) then that could lead to a ramp in orders for Cognex in the spring as manufacturers (Apple is a Cognex customer) prepare to increase their production in the fourth quarter.
Will Emerson Electric's big acquisition pay off?
Readers might wonder why an automation-focused company like Emerson Electric is worth following closely in connection with Taiwan Semiconductor, but hear me out. The main reason comes down to the completion of its $8.2 billion deal to acquire automated test and measurement company National Instsruments (NI) in October.
Test and measurement is one of the automation-adjacent markets in which Emerson Electric is looking to build its future.
However, the price of the acquisition -- 15 times NI's 2023 earnings before interest, taxation, depreciation, and amortization (EBITDA), including cost synergies -- raised some eyebrows among investors. Moreover, investors were concerned by the timing of the deal due to NI's heavy exposure to semiconductors, electronics, and other cyclical industries.
Indeed, one of NI's competitors, Keysight Technologies, is on course to report a 4.6% revenue decline in 2023. Still, if last year turns out to have been the bottom of the trough in NI's fortunes, the deal's timing will prove opportune. In addition, based on Keysight's current valuation in the market, 15 times EBITDA is a decent valuation to pay for this type of business in a trough year.
KEYS EV to EBITDA data by YCharts.
All told, if Taiwan Semiconductor's outlook presages a recovery in consumer electronics and other cyclical industries later in 2024, Emerson's acquisition of NI will look like an excellent deal as the company repositions itself to focus on growth industries.
