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Cognex Struggling To Deliver As Logistics Spending Shrinks

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Machine imagination remains a semipermanent maturation market, but it doesn't automatically way that each instrumentality imagination players are going to spot a soft maturation curve. A heavier reliance connected ID products utilized successful warehouse/logistics automation gave Cognex (NASDAQ:CGNX) a awesome tailwind erstwhile Amazon (AMZN) was spending manus complete fist connected building and automating warehouses, but it's starring to a sadistic hangover arsenic Amazon pares backmost spending and different end-markets for illustration autos and electronics can't capable nan gap.

Since my past update, these shares person fallen astir 6% and lagged nan business sector, arsenic good arsenic rivals for illustration Keyence (OTCPK:KYCCF).

As a applicable matter, it's reliable to urge a maturation banal that's looking astatine immoderate crisp year-over-year quarterly gross declines, and wherever location is still arguably downside consequence to expectations for nan 2nd half of 2023. On nan different hand, nan Street has a measurement of looking past near-term troubles and Cognex banal should exit 2023 pinch year-over-year growth, arsenic good arsenic longer-term opportunities successful aggregate markets that tin support double-digit semipermanent gross growth. I'm still bullish connected that semipermanent potential, but location is still above-average consequence present now.

A Weak End To The Year

In opposition to a reporting rhythm that has seen a batch of business companies station better-than-expected 4th fourth results and reasonably benign guidance for 2023, Cognex came successful anemic and started disconnected 2023 pinch a very anemic guideline for first 4th revenue. The superior driver - a very anemic logistics/warehouse automation marketplace - isn't surprising, though nan magnitude does still look to beryllium astonishing nan Street.

Revenue roseate 4% twelvemonth complete twelvemonth and 17% 4th complete 4th successful changeless rate terms, missing by almost 3% and surely coming successful good beneath nan 10% aliases truthful maturation that has been communal this quarter. Management regrettably does not supply overmuch accusation connected an end-market basis, truthful each I tin connection is immoderate guesswork regarding nan drivers.

Looking astatine nan results from companies for illustration Atlas Copco (OTCPK:ATLKY) and Rockwell (ROK), nan car marketplace was apt beardown this quarter, pinch OEMs ramping up capex to support artillery electrical conveyance launches successful 2023; Atlas specifically called retired patient request for instrumentality imagination systems astatine car customers for BEV and artillery assembly. Likewise, based connected commentary from Atlas and Rockwell, arsenic good arsenic Nidec (OTCPK:NJDCY), request successful nan semiconductor manufacture was apt healthy, while user electronics request was apt up marginally.

Logistics was almost surely weak. Rockwell saw a double-digit diminution successful its 4th from that end-market, and Honeywell (HON) posted a 6% diminution successful its Warehouse and Workflow Solutions business, pinch neither institution apt arsenic leveraged to Amazon arsenic Cognex has been.

Moving further down nan net report, gross separator declined 90bp yoy and 140bp qoq, missing by 70bp, arsenic nan institution is still seeing elevated costs owed to nan occurrence earlier successful nan twelvemonth and nan request to move to brokers to unafraid needed inputs. Operating income was flat, besides a miss versus nan Street, though operating separator did amended 50bp yoy to 23.6%.

Weaker Warehouse Spending Is A Tough Hurdle To Overcome

For astir of Cognex's markets, operating conditions aren't really each that bad. Consumer electronics isn't successful awesome style but should turn again successful 2023 arsenic astir of nan awesome markets (phones especially) are bottoming out. Semiconductor manufacture request could beryllium shakier, particularly connected nan representation side, but capacity investments are still underway successful logic. Other markets for illustration food/beverage, medical, and pharma, should beryllium patient successful 2023, peculiarly pinch nan institution actively moving to grow these businesses pinch caller customers.

I'm much bullish connected nan car outlook for Cognex than I was before, arsenic though wide build-rate volumes aren't looking that beardown successful 2023, location is decidedly an ongoing finance rhythm underway to support artillery and BEV production, pinch BEV accumulation volumes apt to double this year.

Logistics remains nan main rumor for Cognex, and Amazon successful particular. Amazon guidance has been beautiful vocal and definitive astir cutting storage and fulfillment capex successful 2023, and that could mean a 50% aliases greater diminution successful spending this year, aft a 30%-plus diminution successful 2022. Backing that up, Prologis (PLD) has been talking astir a 50%-plus diminution successful storage improvement starts successful 2023. While location is still maturation successful automation spending successful nan logistics abstraction (Rockwell is expecting double-digit maturation successful FY'23), it's not pinch nan systems and customers wherever Cognex is strongest.

The bully news is that while I deliberation it will return a mates of years for Amazon spending to reaccelerate, location are different maturation opportunities retired there. Food and beverage companies are investing importantly much resources into automation to offset labour challenges and amended accumulation efficiency, and location are charismatic maturation opportunities successful different end-markets for illustration medical, biopharma, and user goods.

Longer term, I besides spot maturation opportunities successful 3D imagination for inspection and successful instrumentality imagination systems for robotics. Adoption of instrumentality imagination and robotics is still debased successful astir manufacture end-markets, and ongoing finance successful these systems should support double-digit semipermanent maturation for Cognex, moreover if location will beryllium meaningful year-to-year variability.

The Outlook

I was antecedently beneath nan Street for my FY'23 gross number (about $975 million), but person decided to trim that different 5% mostly conscionable to screen downside consequence successful nan logistics and user electronics spaces. I do expect a double-digit rebound successful FY'24 (up 12%), but again I'm taking a much blimpish stance connected logistics/warehouse-driven spending. I do deliberation location could beryllium an upside from car OEMs arsenic they proceed to ramp up BEV production, not to mention longer-term request from commercial/heavy conveyance manufacturers arsenic they connection caller electrical models.

Long term, I'm looking for gross maturation of astir 10%. I don't deliberation that's needfully a blimpish number, but considering nan benignant of capex car OEMs will request to support ongoing BEV accumulation growth, not to mention maturation successful markets for illustration food/beverage, electronics, biopharma, and logistics/warehouse (which, contempt Amazon's spending is still not particularly highly automated), I judge it's attainable.

I expect margins to beryllium amended successful FY'23, but it will return a fewer years to get backmost to nan highs driven by nan beardown logistics maturation that Cognex saw successful 2021. Long term, I expect free rate travel separator to attack 30%, peculiarly arsenic nan institution benefits from a greater package mix, and I expect debased double-digit FCF maturation modestly up of underlying gross growth.

The Bottom Line

Discounted rate travel still supports a adjacent worth successful nan $50s, though margin/return-driven EV/EBITDA is not astir truthful supportive. Weak near-term results are a headwind, arsenic is nan consequence of an moreover worse vale successful logistics revenue, but I expect Cognex to return to year-over-year maturation successful nan 2nd half of nan twelvemonth and nan Street has a shape of looking astir six months beyond expected weakness.

It will return clip for Cognex to activity again, and location is still immoderate consequence of further miss-and-lower quarters, but investors looking for a "scratch and dent" maturation communicative wherever a return to maturation tin thrust rerating should walk immoderate clip connected owed diligence for Cognex.

Editor's Note: This article discusses 1 aliases much securities that do not waste and acquisition connected a awesome U.S. exchange. Please beryllium alert of nan risks associated pinch these stocks.

This article was written by

Stephen Simpson floor plan picture

Stephen Simpson is simply a freelance financial writer and investor. Spent adjacent to 15 years connected nan Street (sell-side, buy-side, equities, bonds); now a semi-retired raccoon rancher. That past portion isn't wholly true. Probably.

Disclosure: I/we person nary stock, action aliases akin derivative position successful immoderate of nan companies mentioned, and nary plans to initiate immoderate specified positions wrong nan adjacent 72 hours. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.

Editor: Naga



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