What a time it’s been for Cognex. In the past six months alone, the company’s stock price has increased by a massive 68.1%, reaching $64.18 per share. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Cognex, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Cognex Not Exciting?
We’re happy investors have made money, but we’re sitting this one out for now. Here are three reasons you should be careful with CGNX, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last five years, Cognex grew its sales at a tepid 3.5% compounded annual growth rate. This fell short of our benchmark for the business services sector.
2. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable — for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for Cognex, its EPS declined by 2.2% annually over the last five years while its revenue grew by 3.5%. This tells us the company became less profitable on a per-share basis as it expanded.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Cognex’s ROIC has unfortunately decreased. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
Cognex isn’t a terrible business, but it doesn’t pass our bar. Following the recent rally, the stock trades at 43.3× forward P/E (or $64.18 per share). This valuation tells us a lot of optimism is priced in - we think other companies feature superior fundamentals at the moment. Let us point you toward one of Charlie Munger’s all-time favorite businesses.
Stocks We Would Buy Instead of Cognex
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