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May 20, 2021

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Company Overview: Cognex Corporation (NASDAQ: CGNX) is involved in designing, developing, manufacturing, and marketing machine vision systems. It is one of the leaders in the machine vision industry, shipping greater than 200,000 vision systems, and depicts more than $1.5 billion in cumulative revenue since the company was founded.

CGNX Details

CGNX Rides on Acquisition Synergies & Higher Investments: Cognex Corporation (NASDAQ: CGNX) designs, manufacturers, develops, and markets a broad range of image-based products, which utilises artificial intelligence (AI) techniques and give them the human-like capability to make judgments on what they see. The company offers a broad range of machine vision systems and sensors, vision software, and industrial image-based barcode readers designed to address customer requirements. The company’s vision is to expand its position as a leading global provider of machine vision products for industrial customers. In doing so, the company continues to invest in its core markets, such as consumer electronics and automotive, as well as the logistics market.

The company remains on track to expand its foothold in the new machine vision applications and markets via the buyouts of businesses and technologies. Notably, in October 2019, the company acquired Sualab Co., Ltd. (Sualab) for a total consideration of ~$194 million, which consisted of $170 million in cash and the remaining $24 million as deferred payments. The acquisition is in-line with CGNX’s strategies to enhance its deep learning capabilities via the integration of Sualab's intellectual property, engineering expertise, and market coverage. In 2017, the company acquired ViDi Systems S.A. The company opines that these acquisitions are important part of its growth strategy, which, in turn, will enhance the company’s long-term growth rate and profitability. Looking forward, the company expects to pursue prospects to increase its product lines, distribution network, customer base, and technical talent via buyouts in the machine vision industry.

The company witnessed a CAGR of 11.2% and 5.2% in total revenue and net income, respectively, over the period of FY16-FY20. The company remains on track to deliver on its growth strategies through a diversified product portfolio and expanding geographic reach. Further, solid order activities through the consumer electronics and e-commerce markets remain a tailwind.

Key Trends (Source: Company Reports)

1QFY21 Key Highlights: During the quarter, the company reported a net income of $69.85 million, up from $20.48 million reported in the prior corresponding period. Revenues for 1QFY21 came in at $239 million, representing an increase of 43% on pcp and 7% from the previous quarter. The increase can primarily be attributed to constant solid performance in the e-commerce sector of logistics. Notably, revenue from each geographic region, namely the Americas, Asia, and Europe (outside logistics), also increased year over year, owing to improved business activity in an array of industries.

During the quarter, the company reported a gross margin of 77%, up from 75% reported in the year-ago period. The rise in gross margin was mainly due to higher volume and a favourable revenue mix. Research, Development, & Engineering (RD&E) expenditure for the quarter were down 5% year over year, owing to cost-cutting initiatives by Cognex in 2020 post the COVID-19 outbreak and decreased stock-based compensation expense. Selling, General & Administrative (SG&A) expenses rose by 5% on pcp, owing to higher incentive compensation associated with the revenue growth along with the impact of the forex exchange rate.

Q1FY21 Results Key Highlights (Source: Company Reports)

Revenues by Geography: During the quarter, revenue from America stood at $107.8 million, up 79% from the prior corresponding period, driven by higher revenue in the logistics industry, and applications in medical-related industries. Revenue from Europe went up 17% year over year and came in at $57.05 million, due to favourable currency impact. Revenue from the Greater China stood at $38.24 million in 1QFY21, up 45% year over year, owing to higher revenue in the consumer electronics and automotive industries. Lastly, revenues from Other Asia came in at $35.91 million, up from $32 million reported in the year-ago period.

Geographical Highlights (Source: Company Reports)

Key Updates: On May 6, 2021, the company announced that it has declared a quarterly cash dividend of $0.06 per share to all shareholders with ex-dividend date on May 20, 2021 and payment date on June 4, 2021. 

On 31 March 2021, the company informed the market that it has unveiled DataMan® 8700 Series of handheld barcode readers. This next generation of handheld readers is built on a redesigned platform and offers cutting-edge performance for improving factory productivity and component traceability throughout an array of industries, which include automotive, medical devices, electronics, and aerospace.

Key Metrics, Liquidity & Balance Sheet Details: The company exited the quarter with a cash balance of $876 million and zero debt. Net cash inflow from operating activities during the quarter came in at $98.6 million, up from $62.04 million at the prior corresponding period. During the quarter, the company paid $11 million in dividends to shareholders and repurchased shares worth $6 million. A strong history of enhancing shareholders’ value through share buybacks and dividends bodes well for the company.

In 1QFY21, gross, operating, EBITDA and net margins stood at 77.4%, 32.8%, 35% and 29.2%, higher than the industry median figures of 34.7%, 7.7%, 14.4% and 5.3%, respectively. In 1QFY21, ROE stood at 5.3%, higher than the industry median of 3%. Current ratio in the same time span stood at 3.92x, higher than the industry median figure of 2.4x.

Profitability and Liquidity Profile (Source: Refinitiv, Thomson Reuters), Analysis by Kalkine Group 

Top 10 Shareholders: The top 10 shareholders together form around 42.69% of the total shareholdings, while the top 4 constitutes the maximum holding. The Vanguard Group, Inc., and BlackRock Institutional Trust Company, N.A. are holding a maximum stake in the company at 8.94% and 8.39%, respectively, as also highlighted in the chart below: 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group 

Risk Analysis: The company is exposed to the risk of sluggish demand across the overall factory automation market, especially in Europe and the Americas. The company’s business, financial, and operating conditions highly depend on general economic conditions and spending powers of customers. If such circumstances worsen, it may negatively impact the overall financial performance of the company. Also, rising expenses may weigh on company’s financial performance, going forward.  Further, some deferrals of logistics revenues are likely to keep margins under pressure.

Outlook: The company remains on track to bolster its position in the international market. For 2QFY21, the company expects revenues to be in the range of $250 million and $270 million, depicting a substantial increase on a year over year basis. Gross margin is expected to be in the mid-70% range for the forthcoming quarter. The company remains on track to benefit from its robust momentum in the e-commerce sector of logistics. The company has unveiled numerous innovative products in the areas of 3D vision, edge intelligence, and handheld barcode reading, which is expected to positively impact the top-line growth in the days ahead. Also, the company’s cost-cutting implementations, involving decreasing travel, hiring and discretionary expenses are anticipated to partially offset the impact of COVID-19 led uncertainties. Furthermore, a strong liquidity position supported by a robust balance sheet and solid cash flows aid the company to boost its growth initiatives such as collaborations and acquisitions.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative) 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group 

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

Stock Recommendation: Over the last one month, the stock went down by ~11.25%. The stock made a 52-week low and high of $53.65 and $101.82, respectively. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price of an upside of low double-digit (in percentage terms). We believe that the company can trade at some premium as compared to its peer’s average considering the higher investment in its product portfolio, increase in top-line and bottom-line performance in 1QFY21, encouraging outlook and acquisition synergies. We have taken peers like Agilent Technologies Inc (NYSE: A), National Instruments Corp (NASDAQ: NATI), to name a few.  Considering the company’s decent 1QFY21 performance, geographical expansion, encouraging outlook, synergies from acquisition, cost-cutting initiatives, and valuation, we give a “Buy” recommendation on the stock at the closing price of $76.05, up by ~3.54% on 19 May 2021.  

CGNX Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Note: 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.


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