Shares in machine vision company Cognex Corporation(NASDAQ: CGNX) gained 10.7% in December, according to data provided by S&P Global Market Intelligence.
The move comes as the market hopes a lower interest rate environment in 2024 will lead to a recovery in Cognex's main end markets. It's not a coincidence that many cyclical stocks, those whose revenue and earnings fluctuate with the economy, did well in December as market interest rates continued the decline that had begun in October.
What happened to Cognex in 2023
It was far from a vintage year for the company, as it encountered pressure on its primary end markets, namely consumer electronics, automotives, and logistics (e-commerce fulfillment).
While the company hasn't released its full-year results yet, Wall Street analysts expect a 17.5% decline in revenue for 2023. Moreover, the slightly different dynamics across its three end markets conspired to disappoint investors.
Capital spending commitments in the consumer electronics industry (Cognex's machines help align and assemble screens on Apple's phones, among others) depend on companies anticipating strong demand for their products. That's been a tough call in a year when rising interest rates pressured consumer discretionary spending and when consumers retracted from lockdown-inspired expenditure on products.
Image source: Getty Images.
The automotive industry has traditionally been an early adopter of automated technology, and CEO Robert Willett said on a recent earnings call he sees "huge demand coming for EV battery manufacturing" for Cognex. However, car sales are highly sensitive to interest rate movements (monthly repayments increase with higher rates), and automotive companies have been changing their investment plans in response to weakening sales.
Finally, spending in the e-commerce logistics market slowed dramatically as consumer spending slowed and e-commerce companies corrected spending on warehouses after a few years of torrid growth.
Cognex in 2024
The good news is all of these end markets, and others that Cognex serves, can return to growth in 2024, and they'll be aided if interest rates head lower. Consumer electronics and automotive companies can't delay spending forever, as they must introduce new, relevant models. Moreover, Honeywell International's management said that orders for its e-commerce warehouse automation business, Intelligrated, were up double digits year over year in the third quarter -- an early sign of a recovery in the market.
Cognex's management usually updates investors in the spring on its order activity (customers tend to order ahead to prepare for heavy production in the fourth quarter), so keep an eye out for what it says then.
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Lee Samaha has positions in Honeywell International. The Motley Fool has positions in and recommends Apple and Cognex. The Motley Fool has a disclosure policy.
