Cognex Hammered On Ongoing Weakness In Core Markets

Wall Street is weird sometimes. Institutional investors spend remarkable amounts of time collecting data, and yet can still be flat-footed at surprising times. Given the slowdown in factory automation reported by companies like ABB (ABB), Rockwell (ROK), and Schneider (OTCPK:SBGSY), not to mention commentary on the auto and electronics markets from other automation providers like Yaskawa (OTCPK:YASKY) and Fanuc (OTCPK:FANUY), it should have been pretty clear that Cognex (CGNX) would see some real weakness here.

Granted, Cognex’s guide for a year-over-year decline in revenue in 2018 was surprising, so there’s certainly validity to being surprised by the magnitude of what’s going on at Cognex. What’s more, I think you can ask some very relevant questions about whether 2018/2019 is a dip in an otherwise strong investment cycle, or whether 2017/2018 was more of a “supercycle”-like plateau that gave investors a false sense of the near-term market opportunity for machine vision.

I’m still bullish on the machine vision opportunity and Cognex’s long-term opportunities, but guidance for 2020 later this year will be critical. In the high $40s Cognex isn’t a must-buy, and I previously said I was looking for a mid-$40s buy-in price before this revision, but it’s a tempting idea now.

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Cognex Hammered On Ongoing Weakness In Core Markets

Few Sour Notes For Honeywell

At the risk of drifting into the territory of a broken record, Honeywell’s (HON) performance continues to back up my view of the company as one of the best multi-industrials today. With Honeywell’s longer-cycle businesses hitting the sweet spots of their cycles, the company’s growth is finding another gear at a time when shorter-cycle results are likely to be choppier.

With its core businesses doing well (and with runways to do even better) and ample capacity to do more M&A, but no particular necessity, the only issue I have with Honeywell is, predictably enough, the price. It’s tough for me to push my valuation models beyond a fair value of $170 today, and I think Honeywell is now enjoying the status as a Wall Street darling and growth safe haven. Honeywell has earned this love and I wouldn’t advise stepping in front of this freight train, but it’s tougher to get excited about the returns on offer from this high level.

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Few Sour Notes For Honeywell

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

Datalogic Leveraging Its Product ID Know-How Into Larger, Faster-Growing Markets

Automation takes many forms, and product ID is arguably an under-appreciated part of the automation story. Italy's Datalogic SPA (OTC:DLGCF) (DAL.MI) is leveraging a strong foundation in retail data capture (scanners in particular) into new areas and gaining share in markets like manufacturing, logistics, and healthcare as more businesses turn to advanced identification technologies to improve production flows, improve accuracy/reduce errors, and lower overall operating costs.

Datalogic's ADRs are not especially liquid, but these shares are nevertheless worth a look as companies like Honeywell (HON) bring a higher profile to the opportunities to automate in areas like warehouses and logistics. With fragmented competition in the manufacturing and logistics spaces, I believe Datalogic could generate long-term revenue growth in the high single-digits with improving margins and perhaps attract the attention of larger players looking to bring more technology to factory floors and warehouses.

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Datalogic Leveraging Its Product ID Know-How Into Larger, Faster-Growing Markets

Honeywell Looking At Improving Markets And Strategic Options In 2018

I don’t exactly think that Honeywell (HON) is undervalued right now, but it is probably about as close to undervalued as I’m going to find in the large-cap multi-industrial space, or at least outside those stories that need significant self-improvement. With good growth in safety and productivity, ongoing growth in chemicals, a recovery in process automation, and improving conditions in aerospace, 2018 should be a pretty good year for Honeywell. What’s more, the company’s upcoming spin-offs should improve the overall long-term growth outlook and Honeywell has more than enough liquidity to make a significant strategic acquisition or two. Like I said, this stock is not cheap, but the implied return is a little more palatable than for many of its peers.

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Honeywell Looking At Improving Markets And Strategic Options In 2018

At Cognex, The Electric Eye Is Green

If you love growth, you may well like Cognex (NASDAQ:CGNX). If you like growth at a reasonable valuation, this will be a more frustrating story for you. Cognex has established itself as a high-quality leader in the machine vision and product ID space, and high-quality companies deserve premiums, but the Street seems to be baking in an exceptional amount of growth into today's valuation.

I love the prospects for Cognex to introduce new products to expand its expecting opportunities, as well as its opportunities to leverage growth in areas like factory and warehouse automation, and I have little to complain about with respect to how management runs the business. If and when we get another of those market corrections that sweeps many babies out with the bathwater, this would definitely be a name to revisit.

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At Cognex, The Electric Eye Is Green