CGNX - Cognex: Missing The 'Vision' In This Vision Play

2023-08-30 16:35:40 ET

Summary

• Cognex Corporation, a machine vision company, has been underperforming despite its strong positioning in the industry.
• Revenues have been flat in recent years, and the company's stock price has been range-bound.
• The acquisition of Moritex is expected to add 6-8% to total sales, but the deal is not expected to be accretive until 2025.

In June, I believed that Cognex Corporation ( CGNX ) was delivering on a soft performance despite a strong positioning. While the company was well positioned to benefit from increased machine vision applications in industrial, e-commerce, and logistics settings, it was not really living up to the performance.

Failing to have conviction on the execution part of the story, I was inclined to take profits as shares have outperformed the actual business. Over the summer, shares have come down again, trading in the forties after a reasonably solid second quarter earnings report.

Unfortunately, this was accompanied by an uninspiring outlook for the third quarter, as even an apparent reasonable bolt-on deal cannot move the needle significantly here in the short term.

Machine Vision Player

The mission of Cognex is that of machine vision, which aims to replicate human interaction between the eyes and brain into machinery settings, driven by a combination of optics and visions software algorithms. Vision is key in this, used to guide, identify and inspect items, with this expertise to be applied in machinery, product lines, distribution and logistics.

The company has grown sales from $300 million in 2013 to $800 million in 2018, although revenues have been coming in flattish in recent years. A $10 stock in 2013 rose to highs of $70 in 2017, as shares traded rangebound ever since, although shares hit a high in 2021 on the back of optimism on the economy and stock market at large.

2021 revenues came in around a billion dollars, with GAAP earnings reported at $1.56 per share, resulting in sky-high multiples based on the prevailing share prices, even as the business traditionally operates with a substantial net cash position. That said, with shares down to the mid-forties (after losing half their value) in the summer of 2021, I saw some appeal at a mid-twenty earnings multiple, after factoring in net cash balances .

After holding a modest position, shares have moved up to $57 per share in June of this year. This came after 2022 was somewhat of a lost year, with revenues down 3% to $1.01 billion and GAAP earnings down from $1.56 per share in 2021 to $1.23 per share in 2022. Moreover, there was no quick solution or recovery in sight, with first quarter sales in 2023 being down 23% to $201 million, with adjusted earnings per share down 69% to $0.13 per share. This was due to softer macroeconomic conditions and notably fewer e-commerce customers.

The company guided for second quarter sales between $225-$245 million, down substantially from a $275 million number in the second quarter of last year, although some sequential earnings improvements were expected, with second quarter earnings seen between $0.25-$0.30 per share.

Net cash of $844 million was equal to $5 per share, meaning that the unleveraged business trades at $52 per share. That valuation was a bit too high for me, with earnings power seen at $1.00-$1.25 per share, as share price expectations have risen, while the performance has suffered.

Coming Down

After shares traded in the high fifties over the summer, they have come down to $48 at this point in time, a 15% pullback in the time period of a couple of months. In August, Cognex posted second quarter sales of nearly $243 million, down some 11% even as they came in at the higher end of the guidance.

GAAP operating earnings of $65 million were flat, with GAAP earnings per share coming in a penny lower at $0.33 per share, and non-GAAP earnings coming in at $0.32 per share, with net cash reported at $832 million.

While the performance was a bit stronger than guided, one should not put their hopes up too much, with third quarter sales seen at just $180-$200 million. Moreover, gross margin deleverage was expected, with these margins seen in the lower 70s.

With 173 million shares trading at $46, the company commands an $8.0 billion equity valuation, or $7.2 billion enterprise valuation. Needless to say, valuations remain demanding with shares trading at realistically 50 times earnings this year and shares trading around 7-8 times sales.

Buying Some Growth

Later in August, Cognex announced that it has reached a $275 million dash deal to acquire Moritex, an optics component business with strong expertise in Japan. The business is set to add 6-8% to total sales, roughly $60-$80 million by my math, which implies that the business is acquired at a mere 4 times sales multiple.

That marks a substantial discount of 50% to Cognex´s own sales multiple, but there is a reason for that, as the deal is only set to be accretive to 2025 earnings. That being said, it could also be the case that financing costs are more substantial, of course, in this interest rate environment, as there is not much news on the margins of Moritex.

And Now?

With net cash balances down to roughly $550 million post the Moritex deal, equal to about $3 per share, the operating business is valued around $45 per share, all while realistic earnings power trends just over a dollar per share. This still marks a high valuation, and while I have been trimming my position in June, it is too early to get involved in a greater fashion with Cognex again.

The latest deal looks nice, but there are some question marks on that score. The Cognex Corporation outlook for the third quarter is anything but convincing, making me sit this one out for some time to come here, with no imminent turnaround expected.

For further details see: