Corning Should Continue Its Rise

Jun.25.14 | About: Corning Inc. (GLW)

Summary

GLW is giving investors many reasons to buy such as it passing our Free Cash Flow Leaders strategy along with other fundamental green flags.

Insider selling and a high price to sales are reasons for caution but a below average PE and Price to Book should help negate the risk.

Overall GLW should continue to rise, just not as fast as it has over the past year.

Corning Incorporated (NYSE:GLW), according to its website, "is one of the world's leading innovators in materials science. For more than 160 years, Corning has applied its unparalleled expertise in specialty glass, ceramics, and optical physics to develop products that have transformed people's lives. Today, Corning's products enable diverse industries such as consumer electronics, telecommunications, transportation, and life sciences."

Corning is giving us many reasons to want to buy it including:

  • GLW currently passes the Equities Lab Free Cash Flow Growth Leaders Top 10 Strategy which is one of our most robust, consistent and outperforming strategy.
  • GLW has a solid and growing dividend along with other fundamental green flags.
  • Q1 of 2014 is an indication that GLW's sales are starting to accelerate again after stagnant growth in 2012 and 2013.

Free Cash Flow Growth Leader

GLW began passing the Free Cash Flow Growth Leaders Top 10 strategy on May 19th, 2014 and since then it is up over 5%. The strategy is built to locate stocks with strong growth in free cash flow as well as undervalued based on their free cash flow. The conditions the stock must meet are:

  • Free Cash Flow to Shares from the most recent reported year must be at least 10% greater than the previous reported year.
  • Free Cash Flow to Shares from the most recent reported quarter must be at least 10% greater than the same quarter the previous year.
  • Free Cash Flow to Shares from 2 quarters must be at least 10% greater than the same quarter the previous year.
  • Market cap greater than $250 million.
  • The stock's valuation based on Price to Free Cash Flow must be at least 15% greater than the most recent closing price.
  • Free cash flow for the most recent reported year, most recent reported quarter, and the previous quarter must all be greater than 0.
  • Cannot be a financial stock.
  • Price to Free Cash Flow per Share must rank in the bottom 35% of the Industry.

The result of the conditions above is usually around 15-20 stocks, but notice the 2 tabs in the screenshot above labeled "max_holdings" and "order_by". In the order_by tab you will find cash_to_shares_1Q and in the max_holdings tab you will find 10. So of the 15-20 passing stocks, only 10 are allowed to show up and the 10 we choose have the highest cash to shares.

Backtest Performance of the Strategy:

By default the backtest computes performance based on a weekly rebalance, so the only time trades are made are on the first trading day of the week. It buys the stocks that pass the strategy then holds them until the next rebalance day; if the stock still passes after one week then we continue to hold, if it no longer passes then we sell it and new stocks that pass the strategy are bought. We then plot the portfolio performance on a graph next to the S&P 500 and Russell 2000. Below is the backtest result of the strategy described above:

The total return of the strategy from January 3, 2003 to June 16, 2014 is 1717%, or a 28.61% annualized return. 1,878 trades were made during the back test representing about 14 per month. The image below displays the year by year breakdown of the performance:

The strategy outperforms the S&P 500 in all 12 years the backtest covers. In 2014, the strategy has already returned 12.7% while the S&P 500 is up around 6%, and in 2008 the strategy only lost 22% while the S&P 500 lost over 35%. The pie graphs below will give you an idea of the sector and size of the companies included in the backtest.

GLW is a large cap technology stock. On average, the large cap positions held in the backtest returned 3.2% while the Technology positions returned an average of 4.2%.

Dividend, Fundamentals and Sales Growth

GLW's dividend has increased for 4 straight years.

GLW's estimated EPS for 2014 is $1.50 which is a 12% greater than their EPS from 2013. If they maintain a 33% payout ratio then expect the dividend to be around $.5 within a year.

Share buybacks are another green flag.

Click to enlarge

The image above, taken from Yahoo Finance, displays shares outstanding in each of the past 5 quarters. They have decreased consistently quarter after quarter and a total of 11% over the past 5 quarters.

Sales growth was stagnant in 2013 and 2012, but Q1 of 2014 was a much different story. GLW reported sales of $2.29 billion in Q1 which represents a 17% growth from Q4 of 2013 and a 26% growth from Q1 of 2013. Revenue is expected to grow another 10.5% in Q2 of 2014 then another 6% in Q3 of 2014.

Analysts have an estimated 5 year growth rate of 15.1%. The average estimated 5 year growth rate for Electronic Instruments and Controls stocks with a market cap greater than $10 billion is 13.8%.

GLW has also giving us reasons to be cautious:

  1. Insider Selling - Over the last year GLW is up over 50% and insiders are taking profits. The recent activity tells investors that insiders may think the stock is reaching overvalued territory.
  2. High price to sales - GLW has a price to sales of 3.4 while the average for Electronic Instruments and Controls stocks with a market cap greater than $10 billion is 2.3. On the other hand, GLW trades at a PE of 18 while the average of the stocks mentioned in the previous sentence is 22.2. Also GLW's price to book is well below average at 1.5.

Summary

GLW seems to be fairly valued at its current price of around $21.5, but if the stock approaches $24 in the near term one could easily make the case that it has entered overbought territory. In all, we rate GLW a buy because it currently passes our Free Cash Flow Growth Leaders Top 10 strategy and has fundamental green flags that should create institutional and individual demand.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.