Cognex Corporation (NASDAQ: CGNX) makes machine vision solutions that gather and interpret visual data to automate manufacturing and distribution processes that involve vision. Customers may choose from a variety of machine vision systems and sensors, vision software, and industrial image-based barcode scanners. Its products vary from basic presence/absence checks using vision sensors to deep learning solutions for complicated applications with flaws and deviations.

Key takeaways from Q1 FY22 (Ended April 03, 2022)

• Cognex announced USD 282 million in first-quarter sales for 2022, a new high. From Q1-21, revenue climbed by 18 percent, and from Q4-21, revenue increased by 16 percent. Customers made a significant contribution to logistics, and better supply conditions and delivery dates on Cognex products in the first quarter allowed the firm to dispatch a significant number of orders that were in backlog at the end of 2021.
• Due to increased rates Cognex has been paying to obtain components and other inventory that is in limited supply, gross margin was 72 percent in both Q1-22 and Q4-21, compared to 77 percent in Q1-21. Furthermore, the revenue mix in Q1-21 was better than in Q1-22.
• Selling, General & Administrative (SG&A) expenses increased by 12% from Q1-21 and decreased by 3% from Q4-21, due to increasing personnel-related expenditures, stock-based compensation charges, and sales demonstration equipment associated with new product releases, SG&A spending grew year over year.
• Expenses for research, development and engineering (RD&E) grew by 6% in Q1-21 and 2% in Q4-21. On a year-over-year and sequential basis, Cognex incurred greater expenditures related to the company's investment in engineering personnel.

Recent Developments

• John T.C. Lee, President, and Chief Executive Officer of MKS Instruments, Inc., was appointed to Cognex Corporation's Board of Directors on May 5, 2022. Dr. Lee will be a member of the Audit Committee as well as the Compensation and Stock Option Committee.
• The DataMan 280 series of fixed-mount barcode scanners was recently released by the firm. The DataMan 280 has a high-resolution sensor that, when paired with the company's newest decode algorithms and dynamic picture generation technology, boosts code-reading performance and line coverage significantly.

Other Key events of Q1 FY22

• The Board of Directors of Cognex Corporation authorized the acquisition of up to USD 500 million of Cognex common stock in open market transactions on May 3, 2022. Cognex just completed its last buyback program, which was authorized in March 2020 for USD 200 million.
• On May 5, 2022, Cognex Corporation stated that its Board of Directors approved a quarterly cash dividend of USD 0.065 per share, payable on June 3, 2022, to all shareholders of record as of May 19, 2022.

Balance Sheet & Liquidity Position

• As of April 3, 2022, Cognex's financial condition remained excellent, with USD 794 million in cash and investments and no debt.
• Cognex earned USD 50 million in cash from operations in Q1-22 and USD 4 million in net proceeds from common stock issued under stock plans.
• Inventories grew by USD 24 million, or 21%, from the end of 2021 to April 3, 2022, to support the company's higher expected business level in 2022. Cognex is also paying a premium to secure strategic components and other inventories to limit susceptibility to demand fluctuations and component shortages.

Top 10 shareholders

The top 10 shareholders together form around 43.33% of the total shareholding, while the top 4 constitute the maximum holding. The Vanguard Group, Inc., and BlackRock Fund Advisors hold the maximum stake in the company at 8.84% and 8.42%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis

Product risk: A significant portion of the company’s products is presently manufactured by a third-party contractor located in Indonesia. Further, certain key electronic and mechanical components, such as integrated circuit chips, are fundamental to the design of Cognex products.

Macroeconomic risk: Due to the impact of the COVID-19 pandemic and other factors, CGNX has experienced, and may continue to experience, disruptions to the supply of components for the company’s products that have resulted, and may continue to result, in higher purchase costs, delivery costs, and manufacturing delays.

Outlook for Q2 FY 2022

• In Q2-22, Cognex anticipates revenue of USD 265 million to USD 285 million. Higher income from the consumer electronics industry, according to the business, will be offset by the timing of big logistics projects and slower expenditure patterns in the broader industrial automation market. Cognex forecasts yearly sales from consumer electronics and logistics to increase in 2022 compared to 2021.
• Due to rising supply chain expenses, gross margin for Q2-22 is likely to be in the low-70 percent range, much below the company's long-term aim of mid-70 percent.
• On a sequential basis, operating expenditures are estimated to be essentially flat., while excluding discrete tax items, the effective tax rate is estimated to be 16 percent.

Valuation Methodology: Price/Earnings Multiple Based Relative Valuation

(Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company's FY1 trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation:

Cognex Corporation has built upon strong fundamentals, a significant margin advantage over its competitors, and a business secured by patents and intellectual property rights. The company has paid dividends for 19 years in a row, returned USD 1.5 billion in total cash to shareholders since 1981, generated a 14 percent 10-year revenue CAGR (2011-2021), and heavily invested in R&D to improve the value proposition of its products, with 13 percent of revenue allocated to R&D in 2021.

Further, CGNX shares have corrected significantly over the past three months, down 37.15%. The stock is currently leaning towards the lower end of its 52-week range of USD 44.60 to USD 92.17. We believe that the company should trade at a premium to its peer's average as per the historical averages, given its strong competitive advantage against the peer regarding profitability and operational metrics. We have valued the stock using the Price/ Earnings Per Share multiple-based relative valuation method and arrived at a target price of USD 56.35.

Considering the strong fundamentals, robust margins, risk profile, positive outlook, associated risks, and current valuation, we give a "Buy" recommendation on the stock at the closing price of USD 47.10, as of June 01, 2022.

1-Year Technical Price Chart (as of June 01, 2022) Source: REFINITIV, Analysis by Kalkine Group

Technical Levels Summary

*Closing Price as of June 01, 2022

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above. 

Note 3: The report publishing date is as per the Pacific Time Zone.