Will Cognex Earn or Burn?

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Margins matter. The more Cognex (NAS: CGNX) keeps of each buck it earns in revenue, the more money it has to invest in growth, fund new strategic plans, or (gasp!) distribute to shareholders. Healthy margins often separate pretenders from the best stocks in the market.  That's why we check up on margins at least once a quarter in this series. I'm looking for the absolute numbers, comparisons to sector peers and competitors, and any trend that may tell me how strong Cognex's competitive position could be.

Here's the current margin snapshot for Cognex and some of its sector and industry peers and direct competitors.

 Cognex

74.6%

27.3%

22.2%

 Brooks Automation (NAS: BRKS)

31.3%

13.0%

19.0%

 Motorola Solutions (NYS: MSI)

50.3%

13.3%

15.3%

 John Bean Technologies (NYS: JBT)

25.1%

7.3%

4.2%

Source: Capital IQ, a division of Standard & Poor's. TTM = trailing 12 months.

Unfortunately, that table doesn't tell us much about where Cognex has been, or where it's going. A company with rising gross and operating margins often fuels its growth by increasing demand for its products. If it sells more units while keeping costs in check, its profitability increases. Conversely, a company with gross margins that inch downward over time is often losing out to competition, and possibly engaging in a race to the bottom on prices. If it can't make up for this problem by cutting costs -- and most companies can't -- then both the business and its shares face a decidedly bleak outlook.

Of course, over the short term, the kind of economic shocks we recently experienced can drastically affect a company's profitability. That's why I like to look at five fiscal years' worth of margins, along with the results for the trailing 12 months (TTM), the last fiscal year, and last fiscal quarter (LFQ). You can't always reach a hard conclusion about your company's health, but you can better understand what to expect, and what to watch.

Here's the margin picture for Cognex over the past few years.

anImage

Source: Capital IQ, a division of Standard & Poor's. Dollar amounts in millions. FY= fiscal year. TTM = trailing 12 months.

Because of seasonality in some businesses, the numbers for the last period on the right -- the TTM figures -- aren't always comparable to the FY results preceding them. To compare quarterly margins to their prior-year levels, consult this chart.

anImage

 Source: Capital IQ, a division of Standard & Poor's. Dollar amounts in millions. FQ = fiscal quarter.

Here's how the stats break down:

  • Over the past five years, gross margin peaked at 73.3% and averaged 71.5%. Operating margin peaked at 26.1% and averaged 12.8%. Net margin peaked at 21.1% and averaged 11.6%.
  • TTM gross margin is 74.6%, 310 basis points better than the five-year average. TTM operating margin is 27.3%, 1,450 basis points better than the five-year average. TTM net margin is 22.2%, 1,060 basis points better than the five-year average.

With recent TTM margins all exceeding historical averages by a huge amount, Cognex looks like it is doing fine.

If you take the time to read past the headlines and crack a filing now and then, you're probably ahead of 95% of the market's individual investors. To stay ahead, learn more about how I use analysis like this to help me uncover the best returns in the stock market.  Got an opinion on the margins at Cognex? Let us know in the comments below.

At the time this article was published Motley Fool newsletter serviceshave recommended buying shares of Cognex. Try any of our Foolish newsletter servicesfree for 30 days.Seth Jaysonhad no position in any company mentioned here at the time of publication. You can view his stock holdingshere. He is co-advisor ofMotley Fool Hidden Gems, which provides new small-cap ideas every month, backed by a real-money portfolio. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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