Shares of machine vision technologist Cognex (NASDAQ:CGNX) are rallying after the company reported a better-than-feared end to 2018. Revenues came in above management's expectations, wrapping up the ninth straight year of consecutive sales increases. However, the slowdown in machine vision uptake that had investors spooked toward the end of 2018 is here, and it remains to be seen how stubborn that trend will be as 2019 gets under way.
Machine vision taps the brakesMachine vision is an artificial intelligence (AI) system that mimics the interaction between the human brain and eye, giving the machine or computer the ability to "see." Cognex is a leader in the manufacture of the hardware and software that makes machine vision possible, selling everything from barcode readers to auto safety systems to robotic manufacturing systems.
Image source: Getty Images.
AI-enabled machines have been a rising tide for Cognex for years. After the stock doubled several times over in the decade after the financial crisis in 2008, shares have taken a breather in the past year or so. From the start of 2018 to the time of this writing, shares are sporting a 17% decline. That's because of a slowdown in investment in computer vision that started last year, especially in China. While the company still notched growth, it was at a much more sluggish pace than investors had grown accustomed to.
| Revenue | $766 million | $806 million | 5% |
| Gross profit margin | 75.6% | 74.4% | (1.2 p.p.) |
| Operating profit margin | 33.8% | 27.4% | (6.4 p.p.) |
| Earnings per share | $0.98 | $1.24 | 27% |
| Adjusted earnings per share | $1.22 | $1.13 | (7%) |
Data source: Cognex. YOY = year over year. P.p. = percentage points.
Earnings per share still managed an annual increase, although that was attributable to a one-time tax charge at the end of 2017 due to U.S. corporate tax reform. Excluding one-time items, adjusted earnings fell 7% -- legitimizing the worry many had that the cool-off would create some headwinds for Cognex's growth.
More slowdown, but only temporarily?The weakness in sales to China last year -- specifically lower spending for smartphone and OLED display manufacturing -- is beginning to spill over into other markets, especially in automotive. Management said that is creating uncertainty surrounding its full-year 2019 outlook. For the first quarter of the year, sales are expected to be flat, year over year, at the midpoint of guidance. Paired with higher operating expenses from investment back into the business and research costs, that could equate to another drop in earnings to kick off the new year.
However, Cognex said that its customers' project spending on machine vision isn't being canceled, it's merely being delayed. Investment into automation in manufacturing and other end markets is still in play. For example, excluding the pain points from China, Cognex said the rest of its business grew 18% last year. While some sales weakness remains in play at this point, management said it would discuss some big order potential during its first-quarter earnings call in a few months.
In the meantime, the stock is priced at a premium -- not unreasonable given the company's potential growth over the long term due to AI and automation, but enough of a premium that volatility-averse investors should steer clear. Trailing 12-month price to earnings (P/E) is at 40.9, compared to a 12-month forward expected P/E of 33.4. This implies that Wall Street expects that the bottom line will rebound at some point in the year ahead.
After a mixed bag of results for 2018 and a repeat performance in the cards for 2019, shares of Cognex could be in for a wild up-and-down ride. For those who can wait it out for the long-term, though, this company is worth watching.
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