CGNX - Cognex: Execution Lacks At This Vision Play

2024-01-05 10:51:11 ET

Summary

• Cognex Corporation, a machine vision company, has underperformed despite its positioning in the market.
• The company's revenues have been flat for a while, as Cognex hopes to drive growth with a recent deal for Moritex.
• The near-term outlook for Cognex is not convincing, and its valuations are demanding without any growth.

Towards the end of August, I missed the vision in the case of vision player Cognex Corporation ( CGNX ) . The machine vision business has been underperforming for years, despite its good positioning.

With revenues coming flattish for years in a row and the company announcing a relative expensive deal for Moritex, I failed to see appeal, with shares trading in the higher-forties. Even as shares have come down a bit further, I have to reiterate that conclusion, as the near-term outlook is anything but convincing here.

About Cognex

Cognex is a vision play which aims to benefit from increased machine vision applications in industrial, e-commerce and logistic settings, but its business had not lived up to its positioning and expectations in the past.

The idea of Cognex is that machine vision - which aims to replicate human interaction between the eyes and the brain - can be applied into machine settings driven by combining optics with software algorithms. Vision is key in all of this, to guide, identity and inspect items, with algorithms doing the rest.

A $300 million business in 2013 grew to $800 million in 2018, but ever since shares have been trading flat, as the company has failed to benefit from the pandemic-related boom as well.

The strong growth for most of the 2010s meant that shares rose from $10 in 2013 to the $70 mark in 2017, as shares have been trading rangebound ever since, in fact they have come down while the top line stopped growing at the pace seen in the past and even has come down post-pandemic.

While the company grew 2021 sales to a billion, GAAP earnings only came in around a dollar and a half, making it hard to justify the premium valuations seen at the time, even if we factor in an existing net cash position.

With revenues coming down, a $46 stock in August commanded a $7.2 billion enterprise valuation, equal to about 50 times earnings and 7-8 times sales, both looking quite demanding. Moreover, the company announced a $275 million deal at the time, with acquired Moritex announcing $60-$80 million in annual sales, being acquired at a roughly 4 times sales multiple. While this lower sales multiple looked compelling, accretion was only seen in 2025, with few details reported on the margins of the acquired business.

Having held a position in the past, I actually trimmed my position at the time, as an unleveraged business trades around $45 per share, if we factor in the smaller net cash position, as earnings power of a dollar and change resulted in higher earnings multiples.

Coming Down Further

A $47 stock in August has fallen to lows of $35 in the fall, until the lower interest rate environment spurred a rally towards in the broader market by the end of the year. Cognex partially participated in this, with shares now trading at $40 per share.

By the middle of October, Cognex already closed on the purchase of Moritex. By the end of the month, the company reported a 6% year-over-year decline in third quarter sales to $197 million, as this deleveraging resulted in operating earnings being down from $40 million to $30 million, with a higher tax rate yielding just $19 million in net earnings, equal to just $0.11 per share, as adjusted earnings came in at $0.16 per share. So far this year, adjusted earnings only come in at $0.61 per share.

The quarterly report indicated a disappointing fourth quarter outlook, with sales seen down to $175-$195 million, even more disappointing as it includes about a $5-$7 million revenue component from Moritex, which contributes about six weeks to the business. To soften the pain, the company announced a 7% hike in its dividend, but an annual payout of $0.30 per share did not move the needle here as well.

And Now?

With 173 million shares of Cognex now trading at $40 per share, the market value of the firm has fallen to $6.9 billion. This includes a roughly half a billion net cash position (post the Moritex deal closure). The resulting $6.4 billion enterprise valuation comes in around 8 times sales, in fact a bit more as the $800 million run rate is now out of sight.

Moreover, earnings power actually comes in below a dollar per share, which hurts the Cognex Corporation business as net cash holdings have fallen below $3 per share post the Moritex deal. Given all of this, there are few triggers on the horizon, as the business simply fails to execute in accordance to its positioning, making me very cautious to get involved here, as valuations are actually quite demanding amidst the lack of any growth.

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