Corning: Better Days Ahead

Corning (GLW) is one of the core holdings in my long term portfolio. Established in 1851, Corning occupies a leadership position in all the major markets in which it participates.

Corning is a technology based corporation and is a global leader in display technologies and high fiber optics. It produces glass components, such as substrates for active matrix liquid crystal displays (LCDs), for use in LCD televisions, notebook computers and desktop monitors. It also manufactures optical fiber and cable, and hardware and equipments products for the telecommunication industry. Additionally, Corning operates in other segments such as environmental technologies and provides solutions for emission control in mobile and stationary applications.

Corning reports financial results in the following five major segments:

Segment	Percentage of Sales (2008)
Display Technology Segment	46%
Telecommunication Segment	30%
Environmental Technology Segment	12%
Specialty Materials Segment	6%
Life Sciences Segment	6%

Corning’s business is built on innovation and Corning has excelled in this area. As an example, glass substrate innovations at Corning have helped reduce the cost of LCD televisions thereby increasing TV sales. This in turn has increased the demand for Corning products.

An unexpected change in consumer demand is aiding Corning’s strong recovery. On May 28, Corning reported a better than expected increase in demand for its LCD glass. Additionally, last month, Corning raised its guidance of glass sales from 2 billion square feet in 2008 to approximately 2.2 billion square feet in 2009. It also doubled its forecast for growth of LCD television units from 9% to 18%. This indicates the improving conditions of the Asian and US consumer (Corning derives more than 50% of its revenue from Asia).

Corning has a solid balance sheet with $2.8 Billion in cash and $1.6 Billion in debt at the end of 2008. It pays a quarterly dividend of 5 cents yielding 1.4% a year.

The table that follows presents the company fundamentals.

­­­­Company Fundamentals

	GLW
Market Cap (Millions)	$22,000
Sales (Millions)	$5,320
EPS	$2.66
Net Profit Margin	57%
Return on Equity	36%
Projected 5 Year Growth Rate	14%
LT Debt to Cap	10%
Current Ratio	2.79

During the last five years, Corning increased its revenue at an annual rate of 14%. Analysts estimate that Corning would continue to grow at an annual rate of 14% which is in line with its peers and higher than the projected annual growth rate of 10% for the S&P 500 index. The EPS estimates for the Corning are shown below:

EPS Estimates

	GLW
TTM EPS	$2.66
2009 Average EPS Estimate	$0.86
2010 Average EPS Estimate	$1.19

Fair value calculation was performed using relative valuation. The estimated fair value using various methods is presented in the table that follows. It should be noted that the data from the last four financial years was taken in calculating the averages shown in the table.

Valuation

	GLW
	Existing	Average	Fair Value
P/E	5.35	22.86	$20
P/S	4.15	5.45	$19
(P/E) / (P/E – S&P 500)	0.32	1.00	$14
PEG	0.85	1.14	$14

The Call:

I am initiating coverage of Corning with a BUY rating and a 12-month price target of $18 derived by applying a multiple of 15 to 2010 average analyst EPS estimates. At these levels, GLW would be trading in line with the S&P500 index, and at a slight discount to its historic PEG ratio.

Disclosure: Long GLW

Comments

[Boobies:]

Um....ok, let me get this straight. You are giving corning a buy rating because you used analyst numbers to figure out the implied value of shares? You know, you could have just read the analyst report - they do the exact same exercise after calculating their forecasts for EPS.

Usually a Buy rating is given after doing your own model for residual earnings where you forecast earnings based on your assumptions of growth drivers going forward. If you take the analysts' estimates of earnings, you are implicitly taking their assumptions. You have no idea what those assumptions are, so why are you giving a buy rating to the company?

Im pretty sure if you check the Analysts' own recommendations, you will see they have the exact recommendation you do because you are both using the exact same numbers...

lol

May 30 08:41 PM

[Nadeem Moulvi:]

Thank you for commenting on the article.

The estimates that I use are consensus estimates. I do not use estimates from a single source. For example, in the case of Corning, the estimates were an average of 18 analysts. I can assure you that all the 18 analysts do not and will not have a BUY rating on the stock at the same time. Also, I have access to only 1 analyst research report and he currently has a HOLD rating on the stock. Even if you assume that all the analysts have a BUY rating, the chances that they would have the same price target is remote. I like the idea of coming up with my own entry and exit points instead of relying on a single source.

In performing my analysis, I first select stocks based on a certain criteria (see my profile for further details) and then I study the 10k filings and the annual reports. I also analyze the historical performance, company fundamentals, micro and macro factors and finally develop a multiple based on relative valuation analysis. At this stage I use the average analyst estimate to obtain my price targets.

Aside from the points mentioned above, my articles basically serve as a means of saving my research and thoughts, and I am grateful to the SA Editors for offering me an opportunity to share them in public. I do respect your opinion and you have every right to disagree with my views.

May 30 10:21 PM