Japan’s Keyence (OTCPK:KYCCF) is a remarkable company in many respects. In addition to strong positions in key enabling technology areas like machine vision, sensors, and control systems, Keyence has an exceptional margin structure, with outsourced manufacturing, an intense focus on innovation, and a strong marketing effort driving margins that are rarely seen outside of software in the industrial machinery space.
There are downsides and concerns to consider, though. Keyence offers precious little information to investors about its own operations, and most of what I know about the company comes from talking to and following its competitors. Keyence also seems to generate a remarkable level of sales growth for a company with such low R&D spending (around 3% of revenue), and that leads me to wonder if rivals like Cognex (CGNX) will ultimately out-innovate the company.
Valuation has never been simple when it comes to Keyence, and that’s even more true now after a strong run that has seen Keyence leave rivals like Cognex and Emerson (EMR) even further behind. Keyence is a rare asset with respect to metrics like margins and ROIC, and top-tier companies deserve a premium. Likewise, automation demand should continue to outgrow underlying industrial output. Still, with the company already trading at a 2x premium to more normal valuation standards, how much upside can investors really expect?
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