Machine vision company Cognex (CGNX -2.79%) has long been one of the most attractive growth stories in the industrial sector, but gaining an entry level into the stock hasn't been easy in the last year. The good news is that it fell more than 8% on the day that its fourth-quarter results beat analyst estimates. The bad news is that it rose more than 7% the next day. Why the sell-off? Why did buyers come back in? And what are its prospects for its coming year?
Cognex beats estimates
Unfortunately, the best answer to why a stock moves on a given day is usually that there were more buyers than sellers or vice versa! However, you can analyze the underlying trends in Cognex's business and build a picture of why investors would buy or sell the stock. For the uninitiated, Cognex is a company that sells machine vision systems which monitor automated manufacturing processes.
Its fourth-quarter results came in with earnings per share, or EPS, of $0.23; a cent ahead of estimates. Moreover, even though its guidance for the next quarter of revenue of $88 million-$91 million looks a little light compared to analyst estimates of $91.2 million, Foolish investors should appreciate that Cognex tends to be conservative in its guidance. In fact, it has beaten estimates in three of its last four reports.
Key trends for Cognex
Cognex has some strong growth opportunities in the coming years, and it's possible that its share price turbulence was a result of contrasting views on how these opportunities were trending. Before going into details, here is a brief summary of what Foolish investors should look for in future years from Cognex:
- Expansion into the logistics market with its product ID solutions
- Increasing automated manufacturing in emerging markets should create new growth opportunities
- Broadening its market reach into areas like pharmaceuticals, food, and beverage should de-risk the company from over-exposure to any one sector
- Secular growth in the usage of machine vision technology in automation
The two key upside and downside drivers appear to be product ID solutions, and emerging market prospects, respectively.
Cognex defines the logistics market as being a $250 million market, of which it estimates its share is less than 10%. It reports logistics customers within its product ID sales, an end market that it estimates is worth $900 million. According, to Cognex's management its market share in the product ID market is "not much more than 10%". This is a good opportunity considering Cognex's total 2013 revenue was only $354 million. Indeed, the two major deals signed in the logistics sector in the second quarter seemed to kick-start the gradual rise that has seen its stock double since May. Moreover, if Cognex surprises the market by announcing some new logistics deals, you can expect the stock to move higher.
The main worry appears to be its growth prospects in emerging markets, because investors have fretted over the BRICs in recent months. However, despite the fears, there are some positive points specific to Cognex. Its largest industry vertical in China is consumer electronics, and management declared that it was looking forward to "very strong growth from China" in 2014. In addition, it's also strong in the automotive sector, and the evidence from companies like Johnson Controls (JCI -1.65%) and Alcoa (AA) is that China's automotive sector will grow nicely in 2014.
Johnson controls automotive experience segment saw its sales rise 33% in its last quarter,while Alcoa is predicting 6%-10% growth in its automotive segment in China for 2014. In fact, Alcoa forecasts the automotive sector to grow 2%-5% in North America, and it even forecasts that the European automotive sector will grow in 2014. All of which is good news for Cognex, as the automotive sector is its largest industry vertical worldwide.
Where next for Cognex?
Cognex looks favorably positioned in 2014, and it needs to be to justify a P/E ratio of more than 37 times forward earnings. It has upside potential from signing some new logistics deals, and China's consumer electronics sector may bounce back after the Chinese New Year. Meanwhile, the global automotive market remains strong.
On the downside, Cognex is always going to be a company whose prospects are ultimately cyclical, so it always carries macroeconomic risk. It's a great stock when the economy and markets are doing well, but it could underperform if sentiment turns down on the economy, and its valuation leaves little room for disappointment.