Tuesday, October 28, 2014

Cognex ( Nasdaq - CGNX ) -- Big Deal

Cognex reported unusually good Q3 results.  One customer bought $65 million of the company's machine vision systems, propelling total sales ($169.4 million) up by 87% year to year.  Earnings followed suit.  Cognex provided modest price concessions to the large buyer, causing its gross margin to narrow to 74%.  The company usually reports that metric in the 75%-80% range.  Overhead costs went up some, too, but not nearly as much as sales.  So operating income accelerated, driving earnings ahead by 126% to $.59 a share.  Business was excellent even if the large shipment was excluded.  Sales rose 15%, fueled by continued expansion in the factory automation sector.  Cognex did well to keep the rest of its operation intact despite the distraction created by the big transaction.

Fourth quarter performance won't benefit from the unusual contract.  Activity remains vibrant in all keys markets including the U.S., Europe, China, and other parts of Asia.  But a more conventional set of numbers is expected to be reported.  For the year we estimate earnings will finish around $1.45 a share (+56%) on sales of $485 million (+37%).

More large orders are possible in 2015.  Cognex is pursuing several opportunities that may not be quite as large as the one delivered this year, but they could be in the $50 million range.  The existing customer may outfit additional facilities, moreover, generating sizable repeat business.  Smaller customers might not generate the same kind of numbers individually.  But if they start installing machine vision throughout their operations, instead of just in specific applications, average order size could expand across the board.  Several new products and upgrades have been introduced, creating more versatility along with performance improvements.  New markets, logistics in particular, are being opened up, as well.

We estimate 2015 ales will advance 12% to $545 million.  Earnings could expand a little faster (+14%) to $1.65 a share.  Most Wall Street analysts are not inclined to think more large orders will materialize.  Their numbers are lower.  Machine vision remains in an early stage of development, though.  If the technology proliferates to its full potential in the manufacturing area, stronger results are possible.  Long term, the opportunities are almost endless.  Vision will be a central requirement to make machines of all kinds more autonomous and useful.  Cognex has amassed large cash reserves which could applied towards those opportunities.  Most likely the work will be done internally, although technology acquisitions could facilitate the process.

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