Thursday, January 2, 2014

Cognex (Nasdaq - CGNX) - Eyes New Markets

Cognex (CGNX $37.00) is the leading producer of machine vision systems used in factory automation and a wide range of other applications.  (Per-share figures reflect a recent 2-for-1 split.)  The technology speeds up production, lowers costs, tracks inventory, inspects quality, and reduces waste.  The combination of software improvements and faster computer chips has led to enhanced product performance since Cognex went public in 1988.  That trend is likely to continue.

Factory automation remains the company's primary market.  Key segments include automotive, drugs, consumer electronics, and food and beverage.  Exports to China and other developing nations have bolstered growth since the 2008 recession.  Overall expansion has been somewhat muted, though, due to the slow pace of capital spending in the U.S. and Europe.  Cognex also supplies machine vision systems for surface inspection applications, like glass and paper manufacturing.  Sales for use in semiconductor production, the area where Cognex got its start three decades ago, are a factor, as well.

New technologies have unlocked large new opportunities.  Two years ago Cognex introduced a bar code reading technology that is faster and more reliable than conventional scanners.  Shippers like United Parcel Service and Federal Express now are implementing the systems.  Major retail chains have begun to install them in their warehousing operations, as well.  A few initial contracts were registered in the September quarter.  Substantially larger contributions are likely in 2014 and beyond.  Cognex also introduced a machine vision system for life science testing equipment.  Those units are gaining acceptance and now are being designed into future products.  Medical test equipment typically have lengthy product cycles (7-10 years).  As the next generation rolls out Cognex promises to benefit from a building recurring revenue base.

A 3-D vision system was introduced in May 2013.  Manufacturers who required 3-D used to achieve it by using multiple 2-D cameras.  Cognex's new system simplifies the process into a single unit.  The sales lift in the factory automation segment promises to be significant by itself.  The advent of 3-D technology promises to open up entirely new markets, moreover, in the robotics area and elsewhere.

Third quarter results were excellent.  Sales advanced 13% to $90.8 million.  Earnings climbed 19% to $.25 a share.  Comparisons were impacted by negative swings in semiconductor equipment sales.  The surface inspection business also was relatively weak.  That segment fluctuates from period to period.  Logistics orders contributed to the upside.  Further gains are possible in upcoming quarters.  Cognex said 5-10 very large customers are in trials.  It also said 20-30 smaller companies are testing the systems, as well.  Over the next 2-3 years the logistics segment could generate $50-$75 million per quarter, compared to the $5 million brought in during the September stretch.

Sales to China remain vibrant, rising 28% in Q3 to $10 million.  Economic and political factors tend to influence short term results.  But the long term outlook remains bright.  Business in the U.S. and Europe also was good in the quarter.  Despite lackluster economic performance overall manufacturers continue to invest in productivity enhancements for competitive reasons.

We estimate sales will rise 10% to $355 million for all of 2013.  Next year $415-$425 million (+17% to +20%) represents a realistic target.  Earnings appear capable of climbing 16%-21% next year to $1.10-$1.15 a share.  Acquisitions could yield additional leverage.  In 2-3 years income could attain $1.40-$1.60 a share on sales of $550-$600 million.

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