Machine vision company Cognex (NASDAQ: CGNX) hasn’t looked like a growth stock during the past couple of years, but its long-term track record of growth is excellent. Moreover, the slowdown is due to a combination of factors likely to prove temporary. Management continues to believe Cognex’s revenue can rise at a 15% annual rate, and if it does so, the stock will rise during the next decade.
The company provides machine vision products and solutions. It sells them to a wide range of customers who have assembly lines manufacturing discrete items or products that move through a distribution center.
Machine vision technology offers customers the benefit of automated production and helps them monitor, control, inspect, and locate items in ways that humans can’t match. The benefits are myriad, from cost savings by replacing human labor to enabling an automated plant to run 24/7 while maintaining quality control.
Cognex sells its machine vision products across many industries; it focuses on three main sectors, which combined generate about two-thirds of its revenue: automotive (always early adopters of automation), logistics (for example, e-fulfillment centers), and consumer electronics (Apple is a Cognex customer).
As you can see below, its growth has been excellent, but not without ups and downs.
CGNX Revenue (TTM) data by YCharts
Unfortunately, it’s been a difficult couple of years for Cognex — its projected 2024 revenue of $905 million is below the $1 billion figure reported in 2021. To understand what went wrong and also why the slowdown is temporary, it’s a good idea to go back to the three key end markets discussed above.
First, in logistics, Cognex sales were hit by a severe contraction in capital investment after the pandemic-inspired boom when customers invested heavily in e-commerce warehousing. A combination of a natural retraction from the boom and pressure on consumer spending due to interest rate increases pressured logistics sales.
Second, relatively high interest rates slowed vehicle sales, and the pressure was so great that even capital spending plans on electric vehicle batteries (a market Cognex has exposure to) were curtailed.
Third, like automotive, consumer electronics spending is often interest rate sensitive, and customers have cut back on buying new models and, therefore, capital spending on automated production.
These markets are likely to rebound sooner rather than later. E-commerce spending growth has already passed a trough, and capital spending on warehousing will inevitably improve. Similarly, falling interest rates will stimulate automotive and consumer electronics spending.
Image source: Getty Images.
In addition to a recovery in cyclical growth in those three key industries, Cognex has many underlying secular growth drivers:
Adoption of machine vision and automation technology is increasing.
The rising use of AI and digital transformation in manufacturing add value to Cognex’s machine vision solutions because they can be integrated into them, allowing for real-time and continuous interpretation of complex visual data in assembly lines.
The move to reduce supply chain complexity and reshore manufacturing means investment in automation and, in concert, machine vision is necessary to ensure cost competitiveness.
Cognex can grow by expanding applications and adoptions in new industries as they follow the lead of early adopters like the automotive industry.
Image source: Getty Images.
With 2024 set to be a low mark in earnings, it doesn’t make sense to price Cognex on the basis of this year’s profit. Still, for an example of the upside potential, let’s take this year’s estimated sales of $905 million as a base and plug in management’s expectation for 15% annual growth during the next 10 years.
Doing so would result in sales of $3.7 billion. Applying a 30% earnings before interest, taxes, depreciation, and amortization (EBITDA) margin on the stock (Cognex reported 30% in 2020 and 32% in 2021) gives EBITDA of about $1.1 billion 10 years from now. Based on the current enterprise value (market cap plus net debt), and assuming Cognex hits the decade ahead target just discussed, Cognex would have an EV-to-EBITDA multiple of less than 6 times in a decade.
CGNX EV to EBITDA data by YCharts
Given that its EV-to-EBITDA multiple “floor” has been about 25 (as shown in the chart above), it’s clear that Cognex has significant upside potential, provided it delivers on its growth targets.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Cognex. The Motley Fool has a disclosure policy.
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