Cognex Corporation (CGNX), Danaher Corporation (DHR): Why You Should See The Benefits In This High Quality Growth Play

Is it macro?

As ever, investors will want to assess whether Cognex’s strength is due to macro factors or some specific industry or company strength. One of its key competitors, Danaher Corporation (NYSE:DHR), also reported good numbers in its product ID sales. In its latest second quarter results (delivered in mid-July) Danaher reported its product identification revenues were up mid-single digits with sales rising in all its key regions. That’s pretty good growth given that Danaher’s overall sales were only up 2.5%, and it suggests that this segment of manufacturing is capable of growing faster than the market.

Given the connection between the two companies (Cognex’s current CEO was formerly a VP of Danaher Corporation (NYSE:DHR)’s product identification business) and Danaher Corporation (NYSE:DHR)’s highly acquisitive nature, it’s not hard to view Cognex as a potential target for its much larger competitor.

Where next for Cognex?

Cognex’s excellent execution hasn’t gone unnoticed by the market, and its valuation is now looking high.

CGNX P/E Ratio TTM data by YCharts

Looking ahead, the analyst consensus is for $1.98 in EPS for 2014. With the current price around $56, this would put Cognex on a forward P/E ratio of around 28. The chart above suggests this is a fair value for the stock, so it’s hard to argue that the stock is a raging buy.

Cognex Corporation (NASDAQ:CGNX) certainly has the capability to generate upside surprise (new logistics deals, expanding sales in new sectors, etc.), but you will need to assume this in order to see the stock as undervalued right now. This is a high quality company, but investors need to watch it closely for earnings upgrades and/or a better entry point.

The article Why You Should See The Benefits In This High Quality Growth Play originally appeared on Fool.com.

Lee Samaha has no position in any stocks mentioned. The Motley Fool recommends Cognex. 

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