Cognex Tops Estimates

Cognex Corporation (CGNX - Snapshot Report) reported fourth quarter 2010 diluted GAAP earnings per share of 47 cents surpassing Zacks Consensus Estimate of 43 cents per share. When compared on a sequential basis, the earnings rose from 45 cents and increased from a mere 1 cent in the prior year quarter.

For the fiscal year 2010, the company earned $1.52 per share to rise from a loss of 12 cents per share in the prior year. The Zacks Consensus Estimate for the fiscal year was $1.47.

Quarter That Was

Revenue for the quarter was $84.9 million, an increase of 13.2% sequentially and 65.5% from the year ago quarter. The result also beat the Zacks Consensus Estimate of $84.0 million. The increase in revenue was primarily driven by $6.5 million revenue from the Factory Automation market that was deferred until the completion of a single customer contract. Revenue from Surface inspection was also up significantly during the quarter.

For the fiscal year 2010, revenue of $290.7 million beats the Zacks Consensus Estimate of $289.0 million and was up from $175.7 million in the previous year.

Gross profit was up 8.6% sequentially and 72.0% from the previous year quarter to $60.9 million. Gross margin for the quarter was 72.0%, which declined 3 percentage points sequentially but increased by 3 percentage points when compared with the prior year quarter. The sequential decline in gross margin was primarily due to the $6.5 million service revenue and the yearly increase was primarily attributed to manufacturing efficiencies attained from the higher revenue level.

Operating profit increased 2.7% sequentially and rose significantly from the prior year quarter of $0.8 million to $22.9 million. Operating margin was down 3 percentage points but rose 26 percentage points to 27.0%.

Tax rate for the quarter was 14.0% and the company exited the quarter on a strong note with no debt and $283.1 million in cash and investments.

During the quarter Cognex had generated $39.0 million in cash flow from operations and paid $3.3 million in form of dividends to its shareholders.

Quarter Ahead

For the forthcoming quarter, the management expects revenue to range in between $70 million and $73 million, a decrease of 14.0% to %18.0% from the fourth quarter due to seasonal decline in the Factory Automation market, and also expects lower revenue from the Semiconductor and Electronics Capital Equipment market. Operating expenses are expected to increase by less than 3.0% from fourth quarter. The effective tax rate is expected to be 25.0%.

Conclusion

Analyst estimates had been rising in the run up to the earnings release and among the five analysts covering the stock one analyst revised the estimates upward and no analyst lowered its estimates. The average estimate was 43 cents when the company reported.

We note that Cognex Corp. has consistently exceeded estimates over the past year or so. The average surprise in the preceding 4 quarters is a positive 54.75%, and another positive surprise was therefore expected.

The top peers with whom the company competes include Teradyne Inc. (TER - Analyst Report) and Ametek Inc. (AME - Snapshot Report).

Cognex is currently a Zacks #2 Rank, which translates into a Buy on a short-term basis. We have a Neutral recommendation on a long-term basis.

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