Can Cognex Corporation Continue To Improve Sales?

Machine vision company Cognex (CGNX 1.60%)has been steadily increasing sales in recent years. Just in the past 52 weeks, the stock price has risen more than 60%. There is reason to believe that such results will become commonplace for Cognex in the coming years. 

Company overview
Cognex was founded in 1981 and has 1,077 full-time employees, The company helps other businesses with factory automation. More specifically, it improves manufacturing processes by providing technologies that analyze and capture information about what is happening in a factory. The company's products are used to guide, measure, identify, and inspect a number of different aspects in a system of manufacturing and/or distribution. 

Competition
Other key players in Cognex's industry include KLA-Tencor (KLAC 3.13%), Orbotech (NASDAQ: ORBK), and Perceptron. All of these companies, in some form, sell devices that assist in yield management, process control, inspection, identification, and so on. A comparison of the companies is below:

Source: Yahoo! Finance
mrq = Most Recent Quarter
ttm = Trailing Twelve Months   

As you can see, Cognex doesn't stand out as having a significant advantage or disadvantage. It is important to note that these are impressive results from each company. Margins certainly aren't bad in the industry, debt is low, and there's definitely money to be made. If Cognex continues to do what it's doing, and follows through with the growth opportunities that I will address in this article, competition shouldn't be all that detrimental. Maintaining or growing market share will be critical to Cognex's success, and it has just as much of a shot to do this as the competition. Although there some risk involved, I believe Cognex will grow quite quickly.

Growth prospects
This company has a few things to look forward to in coming years. The core of the business is in factory automation, which provided 80% of  Cognex's revenue last year. Sales in this market were up by $37 million, or 16%, from 2012. A wide range of manufacturers can benefit from machine vision in their factories, so this market offers a diversified customer base with companies from varying industries such as automotive, medical, consumer electronics, and food and beverage..

Also, the ID products business performed exceptionally well in the Americas this past year, helping to drive the modular vision systems division's product revenue 13% higher. ID products, a component of the company's vision segment, are designed to read codes to identify certain pieces along the manufacturing and distribution processes. The ID products business is particularly exciting because of the growing logistics industry, where products have to be tracked every step of the way. As shipment volumes increase, Cognex has been making deals with major companies, which have so far remained unidentified, to get their image-based bar code readers into the world to replace traditional laser-based scanners. This is a major shift in the industry that Cognex should capitalize on in the next few years. Additionally, the life sciences industry could initiate heavy use of Cognex's ID products within the next few years, as growing scientific investments and advances call for simpler identification of products. Although many products take a while to reach the shelves because they need FDA approval, Cognex would be able to profit throughout a product's life cycle, which can last seven to 12 years. 

Overall, the ID products business could play a major role for the company in its efforts to continue improving in the coming years. According to Cognex CFO Dick Morin, the size of the global ID market is roughly $900 million and Cognex holds about $250 million of that through the logistics market. Considering that Cognex's revenue was "only" about $353 million last year, this indicates the ID products market could play a huge role in the company's future if it can develop a position of leadership in the business. So far, most of the traction for ID products has been found in the Americas, with some in Europe and little in Asia. That's not to say there aren't opportunities that the company could profit from in Europe and Asia.

The company's strategy with identification products is to provide customers with higher read rates on their part marks and bar codes. A "read rate" is the percentage of codes read correctly. This is a major difference maker for many companies, as it saves time and money because they won't have to deal with as many misread codes. Cognex's technology far outperforms the laser bar code readers used in the past. At a West Liberty Foods plant in Utah, Cognex boosted read rates from 93% to 99.9%. With up to 25,000 boxes shipped per day, this technology becomes a real difference maker. Although ID products is currently only about a third of the factory automation division, it should see continued significant growth for at least a few more years. It will be interesting to see how Cognex goes about capturing this market. 

Conclusion
Right now, Cognex does not stand out as financially superior to competitors. But with a combination of growth in Asia, the ID products business, and a continually strong customer base for factory automation products, Cognex might be able to distinguish itself within the next couple of years.