Machine vision specialist Cognex (NASDAQ: CGNX) is set to report its second-quarter earnings on Monday after the market closes. Going into the report, Wall Street expects Cognex to increase revenue by 38% year over year to $150.1 million and earn $0.47 per share, after adjustments.
Beyond the headlines, investors should also focus on how the underlying business is performing to help determine whether the long-term investment thesis remains intact. In total, there are three major areas for investors to watch when Cognex reports earnings.
1. Automation revenue
Now that Cognex has officially closed on the sale of its surface inspection unit to AMETEK for $160 million in cash, the company's automation business, which accounted for 84% of its first-quarter revenue, has become more important than ever.
Fortunately, Cognex's automation business has been a major beneficiary of an ongoing worldwide trend in manufacturing to become more productive in the factory with fewer resources. In the first quarter, Cognex's automation revenue increased by 26% year over year to nearly $95.3 million.
Including its surface inspection unit, management expects the company will generate between $152 and $157 million in revenue in the second quarter, based on large orders from the consumer electronics industry expected to ship during the quarter.
Using back-of-the-envelope math, if factory automation represents the same 84% of total sales as it did in the first quarter, investors can expect the automation business will generate between $127.7 to $131.9 million in sales. A major deviation outside of this range could indicate issues with large orders.
2. Tentativeness in the U.S.
During Cognex's first-quarter earnings call, management noted it observed some "tentativeness" from U.S. customers to place new factory automation orders, which it thinks is the result of the industry environment and not an underlying issue with Cognex's products. Overall, Cognex's Americas segment saw its first-quarter revenue increase in the mid-single digits year over year, and accounted for 34% of its total revenue.
Although investors don't know the exact size of the U.S. relative to the rest of the America's segment, the reluctance of U.S. customers to place new orders likely holds the potential to impact the company's overall results.
Cognex's first-quarter inventories increased by 36% from the fourth quarter to about $48.5 million. Management attributed the rise in inventories to preparing for the launch of new products and large order shipments.
In recent quarters, Cognex's inventories have risen significantly above their five-year norm, which looks quite jarring when plotted:
Of course, if Cognex's businesses requires additional inventory because it's growing, there isn't any cause for concern. Rising inventories typically becomes an issue when a company can't sell its inventory on hand fast enough that it becomes obsolete.
Breaking it down, about 16% of Cognex's total inventory was being carried as finished goods in the first quarter, meaning it's sitting on the shelf waiting to be sold. The remainder of Cognex's inventory was comprised of raw materials and inventory in the process of being made into final products:
Although Cognex's inventory situation doesn't currently appear to be a concern worth fretting over, a continued rise in inventories could foreshadow potential problems to come.
All eyes on Monday
When Cognex reports earnings on Monday, Foolish investors should focus on how the underlying business is performing, rather than how investors react to the news. Be on the lookout for how Cognex's automation business preformed, an update on U.S. customer orders, and how much inventory the company kept on hand.
Steve Heller has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Cognex. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.