Other Key Revenue Drivers
ID products represent a significant area of expansion for CGNX and it expects 20%+ growth in 2013. ID product revenues were $19.7 million or 24% of total revenues in the quarter so this growth is relevant. In addition, there are hopes that CGNX can expand take-up and utilization of its ID products within the logistics industry. The ID and associated RFID industry does tend to have lumpy orders as evidenced by Roper Industries, Inc. (NYSE:ROP) divisional numbers, which can be looked at here. RFID development takes time because customers tend to want to try the system, analyze the efficacy and then roll it out incrementally. It’s a similar process for CGNX’s ID solutions so it’s understandable if the logistics companies take their time over adoption. Although, with Roper it can expand margins via increased software sales.
Automotive is a key vertical for CGNX and the management declared itself to be cautiously optimistic over conditions in North America amidst predicting mid to high single digit growth. Looking at what Alcoa Inc. (NYSE:AA) reported recently, the strength in automotive production will come from China in 2013 so CGNX will hope to expand sales in this market too. Furthermore, while Alcoa sees European revenues to be down 1-4%, it is a story of bifurcation between a weaker Southern Europe and a stronger Northern Europe and Central Europe. Recall that the German automakers all have some production plants in Central and Eastern Europe.
Where Next for Cognex?
The bullish case for CGNX is that a trough has been passed in the semiconductor and consumer electronics industry and that global manufacturing will hold up in 2013. It sees CGNX expanding ID product sales as intended and the potential for increased end market diversification within its Factory Automation sales.
The bear case contains the usual worries over global growth and concern over CGNX’s exposure to highly cyclical industries.
I happen to be weighted more on the bullish side here. For example, China is under-automated by international standards and the potential to expand end markets is a real one. It is hard to predict what the semiconductor industry will do but I think the evidence is building for at least some stability in 2013. Analysts have CGNX on forward earnings of $1.73 and I would pencil in an assumption of $2 in free cash flow. Assuming the stock should trade on a forward rate of say 5% of enterprise value gives a target of around $47. I would be looking for entry point around $40 for this stock.
The article Has This Growth Company Turned the Corner? originally appeared on Fool.com and is written by Lee Samaha.
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