By: Scott Davis
Cognex is the latest addition to our industrial tech coverage alongside names like TE Connectivity (TEL) and Trimble (TRMB). We love the story and are believers in the factory floor capex theme. But at present we are not comfortable with the consumer electronics risk in the portfolio, and current slowdown risks do seem to be rising. The valuation deserves a big market premium, but upside seems limited until earnings growth re-accelerates. As such, we’re initiating with a Neutral rating and a PT of $53 (32x our 2020E EPS of $1.65). Over time, however, we expect Cognex to be a name we’d like to own. It’s an exceptional company with a unique innovation culture.
For some context, we will start with Cognex’s unique culture. When you drive into Cognex HQ just outside of Boston, it’s quickly clear that you are about to experience something very different. From the large sign that reads “Work Hard Play Hard”, to the big King Kong statue in the entrance, to the dozens of empty bottles of fancy champagne that line the entrance walls. Just inside, there sits a robot fitted with Cognex cameras that assembles and disassembles the case of an iPhone. Product displays and videos showing Cognex products at work in factories, warehouses, semi-fab facilities, etc…
The eclectic early view doesn’t end there. The annual reports were our starting point for diligence and are quite outside the lines of the typical. They are entertaining for one, and feel like something written as a spoof after-hours at a bar. Employees are called “Cognoids” and border somewhere between Google nerd and Boston practical. The founder, Dr. Bob, hails from brainy MIT and set up the company’s roots just 30 minutes away, but now lives in San Diego and has a job title of “Chief Culture Officer”. While not running the day to day, his influence remains high.
Employees get paid well, rarely quit, and are rewarded to fancy vacations and trips on work anniversaries. The stock has compounded even faster than its high earnings growth rate so even the average employee has likely made an outsized amount of money in retirement plans or otherwise. Folks at Cognex seem happy/proud and engaged.
The reality is that Cognex and Dr. Bob thrive on the eccentric innovation culture and shareholders have benefitted. Cognex has 75% gross margins, high ROIC, and an impressive top-line growth rate (13% 15-year CAGR). The valuation is also high (30x 2019 P/E), but the company is on the cutting edge of the biggest changes taking place on the factory floor since the robot was invented. In short, Cognex is a scarce asset in a very unique high-growth space. With limited competition and limited risk to its model. Wherever there are people/eyes in a factory, Cognex has a product to displace. And a market to disrupt. The stock does have outsized volatility, however, and it can be whipped around by consumer product capex investments. Timing is key.