Fanuc Forecasting The Bottom, While Investors Price In The Recovery

It’s not exactly news that the stock market is a look-ahead mechanism for valuing companies, and that’s particularly important to keep in mind today when looking at factory automation companies. While business continues to deteriorate at Fanuc (OTCPK:FANUY) (6954) and may well not truly bottom out until the fall of 2019, the nearly 30% year-to-date move in the stock (well ahead of the average industrial stock) against a roughly 18% drop over the past year suggests that investors are already starting to look ahead to the recovery in orders, revenue, and profits.

Valuing Fanuc has always been problematic, as the company’s perceived quality has generally earned it a premium (not wholly undeserved in my opinion). Even though I’m modeling in a recovery starting in fiscal 2021 (the fiscal year ending March 2021), including multiple years of double-digit revenue growth and a sharp recovery in margins, the shares are well ahead of where those cash flow streams suggest it should be. With that, I’d prefer to wait for a cooldown among names like Fanuc and Yaskawa (OTCPK:YASKY) before stepping up.

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Fanuc Forecasting The Bottom, While Investors Price In The Recovery

Yaskawa Electric's Rocket Ride Anticipates Smooth Sailing

Yaskawa Electric (OTCPK:YASKY) (OTCPK:YASKF) (6506.T) has been a surprisingly volatile stock over the last two years, although it has been one of the best-performing automation stocks over that time, but the 50% move since the start of the year is extreme even by that standard. While many automation stocks have done quite well on year-to-date basis (including Cognex (CGNX), Fanuc (OTCPK:FANUY), and Nidec (OTCPK:NJDCY)), Yaskawa has been the standout as investors apparently not only think that the worst is over, but that demand in markets like China is going to rebound sharply.

Much as I like Yaskawa as a company, I don’t share this view. China’s export-oriented sectors did better than expected in the first quarter, and I don’t see things getting substantially worse unless the trade friction with the U.S. gets worse, but I think a sharp V-shaped recovery is too optimistic given mounting challenges in North America and Europe. With today’s price already anticipating a major long-term acceleration in growth, it’s hard for me to see what can take these shares higher other than just raw momentum.

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Yaskawa Electric's Rocket Ride Anticipates Smooth Sailing

Cognex Muddling Through Some Temporary Macro Challenges

I flagged Cognex (CGNX) back in early December as offering rare upside for a high-growth industrial, and though the shares had further to fall before bottoming on Christmas Eve, they’re still up about 20% since that early December article – outperforming its closest peer Keyence (OTCPK:KYCCF) and industrial stocks in general.

It’s a harder call to make now, though I still really like the machine vision space and continue to believe that Cognex has attractive addressable long-term growth opportunities in logistics, autos, and factory automation. I don’t believe my expectations of low double-digit revenue growth and mid-teens FCF growth over the next decade are conservative and I’m worried that there could still be another round of disappointment in consumer electronics and autos, though a negotiated trade agreement with China could brighten that outlook. I’d definitely look at Cognex again were it to pull back to mid-$40’s, but here it looks more like an attractive hold.

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Cognex Muddling Through Some Temporary Macro Challenges

Yaskawa Electric Taking A Beating On Diverse Headwinds

Japan’s Yaskawa Electric (OTCPK:YASKY) (6506.T) has taken a beating over the past six months, with the shares down about a third as the emerging weakness I saw in the summer has grown into full-blown troubles across the business. With auto demand likely to weaken from here and no real near-term drivers for improved handset or semiconductor order trends, Yaskawa could be looking at a rough trough period, particularly if management won’t step up and cut costs and production in anticipation of tougher times.

When I wrote about Yaskawa back in July I thought the shares weren’t cheap enough relative to the risk, and that’s basically my position now as well. I think the shares are more or less fairly valued now, and could have some upside if conditions improve, but I really don’t expect that to happen and I think there could be more cuts to expectations on the way. The overall quality and market exposures of Yaskawa make this a name to consider for the long term, but I don’t think today is the best time to buy.

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Yaskawa Electric Taking A Beating On Diverse Headwinds

Apple (And China) Taking Another Bite Out Of Cognex

Given the multiples and elevated growth expectations, I think you could argue that the market has actually been somewhat restrained in its negative reaction to Cognex’s (CGNX) challenging 2018 and a weaker outlook for 2019. Granted, the shares are down about a third over the past year (much worse than machine vision rival Keyence (OTCPK:KYCCF) ), but we’re still talking about a company trading at a forward EV/EBITDA in the low-to-mid 20’s.

I don’t think Cognex has necessarily seen the worst of the slowdown, and I do have some concerns that growth expectations and mulitples could have further to fall. By the same token, though, Cognex is a rare high-quality, high-growth asset in industrial automation and a significant player in a key enabling technology. Whether on its own or as part of a larger automation company, I believe Cognex’s business will be significantly larger 10 years from now, and that leads me to lean in favor of not getting too cute trying to time the bottom of this recent downturn.

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Apple (And China) Taking Another Bite Out Of Cognex