On Tuesday, UBS upgraded shares of Cognex (NASDAQ:CGNX), a company specializing in machine vision technologies, from Neutral to Buy, simultaneously raising the price target to $54 from the previous $42. The upgrade reflects a positive outlook on the company's growth potential and the machine vision market's recovery.
The analyst noted that the Machine Vision market correction appears to be concluding and anticipates that Cognex will return to double-digit organic sales growth. The current stock price, according to the analyst, only factors in mid to high single-digit growth rates.
The analyst also expects significant operating leverage to contribute to a 33% compound annual growth rate (CAGR) in earnings per share (EPS) through the year 2026. UBS's estimates for Cognex's earnings are 15% higher than the consensus among analysts, with even further upside to the management's long-term targets.
The rationale behind the upgrade includes the belief that the current market downturn for Cognex has been more severe than previous cycles, effectively wiping out about 70% of the growth achieved since the COVID-19 pandemic. However, with approximately 90% of Cognex's business having already weathered a recession, early indications of improving end markets and sales funnel activity are providing grounds for confidence.
UBS suggests that investors should consider acquiring shares of Cognex ahead of an anticipated increase in market sentiment and potential additional analyst upgrades in the coming quarters. The bank also points out that the company's valuation is modest when based on trough earnings and when compared to its peers, suggesting that the potential returns are disproportionately skewed to the upside, by a ratio of approximately 4:1.
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