CGNX - Cognex: Soft Performance Despite A Strong Positioning

2023-06-04 09:04:46 ET

Summary

• Cognex has been well positioned to benefit from increased machine vision applications in industrial, e-commerce and logistics settings.
• I like the promise of the business, but the overall performance has been a bit soft.
• Amidst shares outperforming the actual performance of the business, I am inclined to take some profits here, not convinced on the execution part of the story.

In the summer of last year, I concluded that shares of Cognex (CGNX) were an interesting long-term play. I liked what I saw for the vision play, with the company set to benefit from increased factory and inspection automation.

With shares down more than 50% from their highs, amidst a re-rating of the shares, the situation started to look quite interesting in my book.

A Recap

I like the prospects in the long run for Cognex, as the machine vision player aims to replicate human interaction between the eyes and brain in machinery, using a combination of optics and vision software algorithms. The vision component is used to guide, identify and inspect items, often used in machinery, product line, distribution and logistics solutions.

On the back of this solid positioning, the company has seen solid growth, having grown from a $300 million revenue base in 2013 to $800 million in 2018, although that some revenues have come in stagnant in more recent years.

A mere $10 stock in 2013 hit a high of $70 in 2017, as shares were stuck in a $40-$70 range ever since given the halt in revenue growth, until they hit the $90s in 2021 amidst optimism on the economy and the stock market coming out of the pandemic.

Early in 2022, the company posted its 2021 results with revenues trending at a run rate of around a billion and earnings coming in at $1.56 per share, that is on a GAAP basis. The company started 2022 on a solid note with first quarter sales up 18% to $282 million, as earnings were quite stable.

With shares trading in the mid-forties in the summer of last year, after being cut in half from their 2021 levels, the company commanded an $8 billion equity valuation based on 177 million shares outstanding, although the company operated with $800 million in net cash.

Adjusted for the net cash holdings and $1.50 per share earnings power, the company traded at 26 times earnings. This marked a hefty premium, amidst the cooling down of key logistics and e-commerce markets, as supply chain issues, inflation and higher interest rates all created headwinds. This even applies to automation amidst massive labor shortages, as the capital intensive nature is hurt by higher interest rates, of course.

That said, with shares down more than 50%, I saw appeal last summer, leading me to initiate a small position in the mid-forties.

Coming To Life

Since the summer, shares have largely traded in a $40-$55 range, although they have recently moved up towards the higher end of the range, actually just above that at $57 per share.

Last summer, the company posted second quarter sales of $275 million, up two percentage points on the year before, with adjusted earnings down two pennies to $0.41 per share.

Third quarter sales plunged after the company was hit by a fire, with revenues down 26% to $210 million, with adjusted earnings essentially cut in half to $0.21 per share. The company saw an improvement in the fourth quarter with revenues of $239 million down just 2% on the year before, with adjusted earnings down three cents to $0.27 per share.

This made 2022 somewhat of a lost year with revenues down 3% to $1.01 billion, and GAAP earnings down from $1.56 to $1.23 per share. That said, on an adjusted basis, the fall in earnings was much less pronounced with earnings down from $1.49 per share to $1.31 per share.

The first quarter outlook was dismal with sales seen at just $180-$200 million, as that did not inspire a lot of confidence. Early in May, it turned out that the results were not as bad as feared, although still relatively soft. First quarter sales were down 29% to $201 million, with adjusted earnings per share down 69% to $0.13 per share. The softness is attributed to a softer macroeconomic environment and notably fewer orders from e-commerce customers.

The company anticipated a small improvement on a sequential basis, seeing second quarter sales between $225 and $245 million, still down substantially from a $275 million number in the second quarter of last year. Moreover, gross margins are seen in the mid-seventies, marking about 4 point improvement on a sequential basis. That suggests a more than $30 million gross profit improvement on a sequential basis, boding well for bottom line margins with operating expenses up in the low single digits.

Hence, I think that earnings should easily come in around $0.25-$0.30 per share for the second quarter, far from great, but a massive improvement from the first quarter. Net cash holdings of $844 million are equal to nearly $5 per share, as the company has maintained the strong net cash balance.

Concluding Remarks

With shares of Cognex having risen to $57 at the moment of writing, operating assets trade around $52 per share. While earnings are likely subdued at perhaps $1.00-$1.25 per share for the year, it is clear that expectations have risen a bit, as the performance has been a bit softer than I anticipated last summer.

With shares up a quarter over the past year, amidst modest operating performance, the risk-reward has deteriorated a bit, to the point at which I am contemplating selling my shares if they move higher to the $60 mark, perhaps driven by enthusiasm around AI.

For further details see: