Initiating Cognex (CGNX) with a BUY rating
​We are initiating coverage on Cognex (CGNX), a leader in Machine vision systems with a Buy Rating and a $91 PT. Our BUY thesis is driven by our view that: a) the company will grow its top line by 15-20% for each of the next two years given an improving global macro and increasing presence of its products across various verticals (consumer electronics, automotive, Logistics, semis,..) b)With revenues growing double digit y/y, we see significant operating leverage in the model enabling earnings to rise > 20% y/y (Street is 10% y/y in CY17) and, c) Given the company’s track record of strong free cash flow generation over the years (5 year average is 28% of revenues), we estimate CGNX will generate >$450m in free cash flow over the next two years (CY17 & CY18) thereby increasing its cash on the balance sheet to $1.1bn ($14/share) by YE18. In terms of valuation, while we believe the stock at current levels (35x forward PE, 3-year median is 31x) may be somewhat rich, shares have always traded historically at a premium compared to peers given the company’s unique products/markets and how it has executed and positioned itself as a key enabler for automation. Our $91 PT is based on 35x CY18 EPS of $2.60.
Cognex is a provider of machine vision products that capture and analyze visual information in order to automate manufacturing and distribution tasks where vision is required. Machine vision products are used to automate the manufacture and tracking of discrete items, such as mobile phones, aspirin bottles, and automobile tires, by locating, identifying, inspecting, and measuring them during the manufacturing or distribution process. The company provides a range of machine vision systems and sensors, vision software, and industrial image-based barcode readers. The company's products also have a variety of physical forms, depending upon the user's needs.
Summit Insights Group LLC (SIG), founded by Srini Nandury in 2018, is a fundamentals-driven, technology-focused, equity research boutique. SIG analysts cover Semiconductors, Semicap Equipment, Enterprise & Application Software, and IT Hardware & Storage companies. The firm also provides insight into adjacent areas such as Mobile and Internet Technologies.
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