Machine vision company Cognex (CGNX -2.44%) hasn't looked like a growth stock over the last 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 can grow revenue at a 15% annual rate, and if it does so, the stock will be materially higher over the next decade.
Introducing Cognex
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 are moved 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 and ensure 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: automotives (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
A temporary slowdown in a long-term growth story
Unfortunately, it's been a difficult couple of years for Cognex, and its expected 2024 revenue of $905 million is below the $1 billion figure reported in 2021. To understand what went wrong and 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 have been hit by a severe contraction in capital investment following the pandemic-inspired boom when customers pulled forward their e-commerce warehousing plans. A combination of a natural retraction from the boom and pressure on consumer spending due to rate rises pressured logistics sales.
Second, relatively high interest rates have slowed automotive sales, and the pressure has been so great that even capital spending plans on electric vehicle batteries (a market Cognex has good exposure to) have been curtailed.
Third, like automotives, consumer electronics spending is often interest rate sensitive, and customers have cut back on introducing new models and, therefore, capital spending on automated production.
These markets are likely to return to growth sooner rather than later. E-commerce spending growth has already passed a trough, and capital spending on warehousing will inevitably improve. Similarly, a lower interest rate environment will stimulate automotive and consumer electr
Image source: Getty Images.
The long-term growth story remains positive
In addition to the growth kicker from a return to a potential return to cyclical growth in its three key industries, Cognex has many underlying secular growth drivers:
- Adoption of machine vision and automation technology is increasing.
- The increasing use of AI and digital transformation in manufacturing add value to Cognex's machine vision solutions as they can be integrated into them, allowing for real-time and continuous interpretation of complex visual data in assembly lines.
- The movement 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.
A millionaire-maker stock?
With 2024 set to be a trough year in earnings, it doesn't make sense to price Cognex on the basis of this year's earnings. Still, for an example of the upside potential, let's take this year's expected sales of $905 million as a base and plug in management's expectation for 15% annual growth over the next 10 years.
Doing so would result in a doubling of sales to $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 in 10 years. Based on the current enterprise value (market cap plus net debt), Cognex would be put on an EV/EBITDA multiple of less than 6 times in a decade.
CGNX EV to EBITDA data by YCharts
Given that its EV/EBITDA multiple "floor" has been around 25 times, it's clear that Cognex has significant upside potential, provided it delivers on its growth targets.
