Cognex Corporation Isn't Immune From Industrial Weakness

By Lee SamahaFool.com

As has been the case with many industrial companies,Cognex(NASDAQ: CGNX) reported slowing conditions in its markets in the third quarter. Moreover, management gave soft guidance for the fourth quarter and cautioned investors against too much near-term optimism. On the other hand, management still views Cognex has a long-term growth business, so let's take a closer look at what exactly happened in the third quarter.

Cognex's third quarter: The raw dataHeadline numbers:

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  • Third-quarter revenue from continuing operations declined 30% to $107.6 million compared to the same period last year but was within the guidance range of $106 million to $109 million
  • Gross margin of 76% in line with guidance
  • EPS from continuing operations declined 45% to $0.29

Don't panic. The dramatic declines in revenue and earnings are due to the distorting effects of revenue generated from a huge order with Apple in last year's third quarter. In fact, the current third-quarter results were pretty much in line with guidance. However, the financial guidance and outlook for the fourth quarter will concern investors.

  • Fourth-quarter guidance for revenue in the range of $94 million to $97 million, a range increase of just 0% to 3% on a constant currency basis compared to last year's fourth quarter
  • Growth rate "negatively affected by deterioration in the industrial markets the company serves"
  • Gross margin in the mid-70% range
  • Operating expenses to increase 5% from the third quarter

What happened with Cognex this quarterI previewed the five things investors should look out for in the results in the article linked, and I'll cover each consideration below. I've already outlined the headline numbers and, obviously, the revenue guidance is disappointing.

In a familiar refrain from the current earnings season, CEO Robert Willett outlined near-term uncertainty in China. Quoting from the earnings release: "During the quarter, we experienced a slowdown in demand from customers in Asia and in the automotive industry, globally. As a result, we are more cautious about our revenue outlook in the near term."

However, it isn't just about China and Asia. In fact, as Willett disclosed on the earnings call, "In the Americas, lower demand and project delays have slowed growth since the beginning of the year. Spending by U.S. manufacturers in most industries we serve was disappointing in Q3, and we don't expect to see any meaningful change this year."

Essentially, the company is seeing a continuation of weakness in North American orders, but China/Asia weakness is more of a current development. As a consequence, management is focusing more on increasing productivity and rate of hiring employees and investing "will be significantly slower than in the past several quarters" -- usually what you would want management to do.

Larger orders drying upThe second half of the year is even more disappointing when considering that earlier in the year Cognex's management indicated the possibility of signing large orders in consumer electronics and logistics. Willet addressed the issue on the earnings call and outlined how these projects were delayed:

The question is, when will Cognex start to sign large orders again?

Looking aheadThe results and guidance demonstrate that Cognex is not immune from general industrial conditions, and stock followers will need to monitor conditions in China, particularly in Cognex's core end markets of consumer electronics and automotive.

The outlook for the fourth quarter isn't positive, so investors should focus on what conditions could look like at the start of 2016. Management reiterated the belief that Cognex is a long-term growth business, but clearly the company needs help from the economy.

The article Cognex Corporation Isn't Immune From Industrial Weakness originally appeared on Fool.com.

Lee Samaha has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Cognex. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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