Has Cognex Corporation (CGNX) Turned the Corner?

Machine vision company Cognex Corporation (NASDAQ:CGNX) reported better than expected results and the market rewarded the company with an initial markup. I could stop the commentary right here but I think investors should look deeper into these numbers because there are a lot of things going on here. In summary I think the slowdown in the consumer electronics industry in 2012 has hit Cognex disproportionately hard, and if you consider that is about to turn up then the company is well worth a closer look.

Cognex’s Mixed Q4

For the sake of brevity I am not going to introduce the company to readers but sufficed to say there is a good primer article on CGNX linked here. Revenues and earnings declined in the quarter and superficially the company appears stuck in a downtrend as earnings fell for the full year to $1.56 from $1.63 last year. Before delving into further details, a quick look at the revenue split by marketplace in 2012.

Breaking out revenues by marketplace shows that Factory Automation revenues actually grew 4% for the year and 1% in the quarter. Surface Inspection revenues grew 5% for the full year and 22% on the quarter, but don’t get too excited because revenues tend to be very lumpy in this division. The real story of 2012 is that Semiconductor and Electronics Capital Equipment sales declined 24% for the year and 20% for Q4.  Note that this market made up 12% of revenues last year but only 9% in 2012.

Similarly the weakness in the Factory Automation numbers came from the consumer electronics industry which is highly correlated to the semiconductor industry anyway. Moreover, Cognex’s relative exposure is not doing it any favors either. Japan is a key geographic region; its Factory Automation revenues declined 17% in the quarter, and for Asia overall it was a 21% decline.

Consumer Electronics Trough?

Much of what Cognex reported on consumer electronics could have been predicted by looking at Semiconductor Industry Association reports (SIA) and you will find a graph of changes in 2012 in the link. In order to demonstrate the geographic relevance and highlight the tentative signs of a trough being passed I’ve tabulated some numbers from it.

Clearly Cognex’s Japanese exposure has hurt it and much of its current sales to China are related to consumer electronics. Management stated that around 11% of its Factory Automation revenues came from China in 2012. Going forward, the challenge is to diversify its end markets for factory automation, particularly within China. For example it has opportunities to do so within automotive, food and beverages.

Regarding semiconductors I view the latest industry numbers as a positive, and Intel Corporation (NASDAQ:INTC) forecast that its gross margins would be flat next quarter. I discussed these issues in an article linked here. The best indicator of a bottoming out process in consumer electronics is what happens with Intel’s gross margins and its inventory to sales ratio. As such, Intel reported a significant reduction in inventory in the last quarter, and the gross margins appear to be stabilizing. Coupled with the SIA numbers, this tentatively implies a trough in the industry.