No, it’s not 3D printing (that’s what the Fool was pitching for the next “industrial revolution” a few years ago). Thankfully. That hype parade seems to have been left behind for now, though maybe it will come back if the business opportunity in 3d printing is better someday. Today the pitch is about “Machine Vision.”
Huh? I guess that could be a lot of things, from visual processing (which has gotten talked up quite a bit when it come to driverless cars-related picks like NVIDIA or MobilEye) to barcode readers. So what’s the Motley Fool pitching?
Well, it’s actually Motley Fool Canada this time around — they’re selling subscriptions to Stock Advisor Canada, which is the north-of-the-border version of the Fool’s flagship newsletter, it looks like they pick one Canadian and one non-Canadian stock in each issue (the pundit behind this one is Iain Butler, if you’re curious).
The two teaser picks of his that we’ve sniffed out were MTY Group (MTY.TO) a couple years ago, which is flat, and Magna International (MGA) last Summer, which has dropped 35% (all the auto-related stocks are down, but Magna is down much worse than most — I’d say only about 5% of that is because of the Canadian dollar).
Here’s how they sell this new idea:
“Being released tomorrow: Our top stock recommendation – a leader in automation technology! ….
“At the World Economic Forum in Davos, Switzerland, last week, members were focused on what they dubbed, ‘The Fourth Industrial Revolution.’ With the idea of ‘automation’ resonating throughout.
“And our team at Stock Advisor Canada is right there with them. We’ve even named an industry leader in machine-vision technology as our top U.S. stock for investors in January.
“After growing cash from operations by an average of over 20% each of the last five years, we’ve finally seen shares pull back to a level we haven’t seen since early 2013. In our minds, this was an opportunity too good to pass up.”
So who is it? We get a few more clues:
“… with zero debt on the balance sheet, our analysis suggests raising its dividend consistently over time is a distinct possibility.
“Revenue has grown by an average of nearly 15% per year since 2010;
“It’s addressable market spends an estimated $2 billion each year;
“Boasts a wide moat around its extensive portfolio of intellectual property (PLUS over 300 additional patents pending!);
“And it’s Price-to-Book value is the cheapest it’s been since the first half of 2013!”
Thinkolator sez: this is very likely Cognex (CGNX) — can’t be 100% certain, given the somewhat squishy clues.
Cognex does indeed have a great balance sheet, with no debt — and they have raised the dividend, though it’s still extremely small (current yield is less than 1%, the the dividend has been raised seven times since 2009… though it was cut in 2009, so they aren’t necessarily a “guaranteed” dividend raiser).
And yes, the price/book value is as low as it has been since May or June of 2013, CGNX trades for just over 3X book (it was over 5X book at the peak last year, but spent 10 years before that right around the current level… so I don’t know that this price/book valuation argument is particularly conclusive).
Cash from Operations has roughly doubled over the last five years, so, depending on how you measure you could probalby say that it has gone up an average of 20% a year… but almost all of that growth came in 2014. Free cash flow per share, likewise, almost doubled over the last five years (to about $1.60 for the trailing twelve month period) — but essentially all of that growth was within the last year or so.
Here’s how Cognex describes itself on the latest investor fact sheet:
“Cognex Corporation (NASDAQ: CGNX) is the world’s leading supplier of machine vision products for manufacturing and industrial identification. Cognex vision and ID systems are used throughout the production and distribution process to optimize product quality, reduce manufacturing costs and track items throughout the supply chain. Since its founding in 1981, Cognex has:
• Generated over $4 billion in cumulative revenue;
• Shipped more than 1 million vision systems;
• Received 433 U.S. and international patents, with 341 additional patents pending and allowed”
What we now call “machine vision” would, a few years ago, have probably been “measurement tools” and “barcode readers.” But “machine vision” certainly sounds cooler.
And yes, they’re (they say, at least) the leading company in this area, and these kinds of tools for measuring and verification are important for what seems to be an increasingly automated world, including the robot-driven factories for all sorts of goods. I don’t know if that means they have a strong “moat” around their business or not, but they look like they might at least have some defensive positioning. Presumably the sensors, scanners and cameras are not so expensive that customers would be price-sensitive if it risked the smooth operations of their factories, and in these kinds of cases there is often strength in a brand and a long-term customer relationship, but I don’t really know anything specifically about Cognex.
There’s been a fair amount of bullish investment media coverage of Cognex, including from the Motley Fool a few weeks ago and IBD back in November, but an analyst from FBR also had this to say on the negative side a couple months ago in a Barron’s note:
“Cognex is the industry leader in machine vision—automated systems that guide, inspect, gauge and identify a myriad of parts and products in automated manufacturing and sorting processes—that are key lynchpins in systems designed to improve supply chain efficiency. In recent years, Cognex has benefited from a number of large e-commerce-related orders; as such, project-related demand has seemed to wane in 2015 (and potentially 2016), and we believe its multiple could come under pressure as growth slows relative to tough comps.”
That seems to have happened to at least some extent, the stock was trading at a PE of 16 or so back in November and is at about 13 now, though the big fall in the stock came before that. They’re releasing their earnings on February 10, so I assume we’ll learn more then about the future prospects — as of now, the expectation is that full year earnings for 2015 will be about $1.18, significantly lower than the $1.36 they posted in 2014, and that 2016 will be about the same as 2015… so it’s trading for about 25X current year or next year earnings and isn’t currently expected to grow this year, but is expected, at least by analysts, to start growing at a decent clip again within a few years and average 15% or so earnings growth in the future.
Not overwhelmingly exciting, but I suppose if they get more big projects and surprise with growth they could return to the optimistic prices the stock saw last year in the $50s… the downside, absent actual bad news (like significantly weaker-than-expected earnings or a market crash), would probably be something like a 12-15 multiple on earnings, which right now would put them somewhere in the $14-18 range. The dividend is not big enough to support the stock right now, but if it becomes a strong long-term performer the dividend growth might end up working out well for current investors.
So that’s what we’ve got on Cognex — it’s a likely match, but not a 100% certain one… and it’s a beaten down and interesting stock, but is neither growing nor cheap, so you can see what you wish to see in this one. It’s probably a nice Rorschah test for your level of optimism about the factory automation market (or even the stock market) overall. If you’ve got an opinion, feel free to shout it out with a comment below.
Disclosure: I do own LEAP call options on NVIDIA, which is mentioned above. I don’t own any other stock mentioned above, and will not trade any covered stock for at least three days.