I find Corning Inc. (NYSE:GLW) stock to be an excellent combination of value and growth dividend stock. After a sharp drop in its stock price, now is an excellent opportunity for long-term investment in GLW's stock at a cheap price. In my opinion, Corning still has plenty of room to move up. The company had great results in the last quarter, and it expects the third quarter will bring its eighth consecutive year-over-year quarterly sales and earnings improvement. GLW has compelling valuation metrics and strong earnings growth prospects. Furthermore, the company is generating strong free cash flows and returns value to its shareholders by stock buyback and increasing dividend payments.
Corning is a world leader in the manufacture of specialty glass and ceramics. Drawing on more than 160 years of materials science and process engineering knowledge, Corning creates and makes keystone components that enable high-technology systems for consumer electronics, mobile emissions control, telecommunications and life sciences. Corning manufactures and processes products at approximately 70 plants in 13 countries. Corning Incorporated was founded in 1851 and is based in Corning, New York.
Corning operates in five reportable segments: Display Technologies, Telecommunications, Environmental Technologies, Specialty Materials and Life Sciences. A comparison between the different segments' revenue in the second quarter of 2014 to that of 2013 is shown in the chart below.
Data: Company's report
The Display Technologies segment generated around 40% of total revenue. Core sales were $1.1 billion, a 62% increase over core sales of $670 million a year ago. The sales improvement was driven by the consolidation of Corning Precision Materials. Core earnings for the quarter increased by 9% from the year-ago comparable period. LCD glass volume grew in the low teens percentage sequentially and was higher than anticipated. As the company expected, price declines were more moderate versus the first quarter. Management stated that the World Cup may have pulled in TV demand into the last quarter, so forecast for the year was maintained.
Sales in Corning's Specialty Materials segment were $298 million, up 14.2% sequentially and down 1.0% year over year. Gorilla Glass sales were less than anticipated in the quarter, due to lower retail demand for smartphones and high-end tablets, and lower-than-expected sales for planned new models.
The table below presents the valuation metrics of GLW, the data were taken from Yahoo Finance and finviz.com.
Corning's valuation metrics are excellent; the company has a low debt, the Enterprise Value/EBITDA ratio is very low at 9.56, and the price to free-cash-flow ratio is also very low at 11.50. According to Yahoo Finance, GLW's next financial year forward P/E is very low at 11.97 and the average annual earnings growth estimates for the next 5 years is very high at 15.10%, these give an extremely low PEG ratio of 0.79. The PEG Ratio - price/earnings to growth ratio is a widely used indicator of a stock's potential value. It is favored by many investors over the P/E ratio because it also accounts for growth. A lower PEG means that the stock is more undervalued.
Dividend and Share Repurchase
Corning has been paying uninterrupted dividends since 2007. The forward annual dividend yield is at 2.01%, and the payout ratio is only 32.8%. The annual rate of dividend growth over the past three years was very high at 24.9% and over the past five years was also high at 14.3%. I consider that besides dividend yield, the consistency and the rate of raising dividend payments are the most crucial factors for dividend-seeking investors, and GLW's performance has been impressive in this respect.
Source: Charles Schwab
The company has a low debt; it generates lots of cash (price to free-cash-flow is only 11.50), and the payout ratio is low. Therefore, there is a good chance that the company will continue to raise its dividend payment.
In the second quarter of 2014, Corning repurchased 9.3 million shares for approximately $200 million under its current share repurchase program. The company also received 8.7 million shares in May from the settlement of an accelerated share repurchase transaction initiated in the first quarter of 2014. The company has approximately $400 million remaining under the share repurchase program that it expects to use by year-end.
Latest Quarter Results
On July 29, Corning reported its second-quarter year 2014 financial results, which misses EPS expectations by $0.01 (2.60%) and beat on revenues. Profit missed analysts' estimates as demand for Gorilla Glass, the hard cover glass used for smartphones and tablets, was weaker than the company expected.
- Core sales were $2.6 billion, a 28% increase on a year-over-year basis. Net sales (GAAP) were $2.5 billion, a 25% increase on a year-over-year basis.
- Core earnings per share were $0.37 per share, a 16% improvement over a year ago, marking the seventh consecutive quarter of year-over-year core EPS growth. GAAP earnings per share were $0.11.
- Corning's LCD glass volume grew more than expected due in part to stronger-than-expected retail TV sales in Europe and South America, likely driven by the FIFA World Cup. Year-over-year sales in the Optical Communications and Environmental Technologies segments grew 14% and 25%, respectively.
In the report, Wendell P. Weeks, chairman, chief executive officer, and president, said:
We had great results in the quarter that led to our seventh consecutive year-over-year quarterly core earnings improvement. We have positive momentum, and we are well-positioned to deliver on our 2014 business plan. We are particularly pleased with the improved performance in our Display Technologies segment. As we anticipated, LCD glass price declines were more moderate than they were last quarter. The integration of Corning Precision Materials Co., Ltd. into our global organization is proceeding very well, and we are benefiting from synergies attained through the consolidation.
Competitors and Group Comparison
According to Corning, it competes across all of its product lines with many large and varied manufacturers, both domestic and foreign. Corning believes its competitive advantage lies in its commitment to research and development, and its commitment to quality.
A comparison of key fundamental data between Corning and its main competitors is shown in the table below.
Source: Yahoo Finance, finviz.com
Corning's valuation metrics look better than those of its main competitors. Corning has a lower debt to equity ratio, stronger earnings growth prospects and a lower PEG ratio.
Most Corning's Margins parameters have been much better than its industry median, its sector median and the S&P 500 median, as shown in the table below.
The charts below give some technical analysis information.
The GLW stock price is 9.14% below its 20-day simple moving average, 8.06% below its 50-day simple moving average and 3.62% above its 200-day simple moving average. That indicates a short-term downtrend, and long-term uptrend.
Chart: TradeStation Group, Inc.
The weekly MACD histogram, a particularly valuable indicator by technicians, is negative at -0.2258 and descending, which is a bearish signal (a rising MACD histogram and crossing the zero line from below is considered an extremely bullish signal). The RSI oscillator is at 45.87 which do not indicate overbought or oversold conditions.
Analyst opinion is divided, among the twenty analysts covering the stock, four rate it as a Strong Buy, three rate it as a Buy, twelve rate it as a Hold and one analyst rates it as an Underperform.
TipRanks is a website that ranks analysts according to their performance. According to TipRanks, among the analysts covering GLW stock there are only six analysts who have the four or five star rating, one of them Argus Research's Jim Kelleher recommends the stock, and the other five analysts have a Hold rating on GLW stock.
After reporting slightly weaker-than-expected EPS on July 29, GLW's stock declined as much as 9.3% in the same trading day (GLW reported before the market open). However, since the beginning of the year GLW's stock has gained 11.5% while the S&P 500 index has increased 6.6%, and the Nasdaq Composite Index has risen 6.9%. Moreover, since the start of 2013 GLW's stock has gained 57.4% while the S&P 500 index has increased 38.1%, and the Nasdaq Composite Index has risen 47.8%.
The sharp drop in the stock price was because the company lowered its forecast for Gorilla Glass shipments, which are now projected to rise 20% for the year, down from a prior projection of more than 24% growth. Specialty materials, including cover glass, account for only about 12% of Corning's sales. However, Gorilla Glass is the highest-margin product the company sells. Corning had said in January that it expected shipments of Gorilla Glass alone to rise at least 30% in 2014.
Recently there has been much talk about Apple (NASDAQ:AAPL) planning to use sapphire in their next phone and the influence of this move on the demand for Gorilla Glass. In my opinion, it should not have a significant effect on the demand for Gorilla Glass because sapphire is suitable only for small areas and iPhone only represents relatively small part of Gorilla Glass applications. Moreover, according to Corning, it plans to introduce a new, enhanced generation of its market-leading Gorilla Glass later this year, which most probably will cause most Android devices continue to use Gorilla Glass.
According to the company, synergies from the Corning Precision Materials acquisition are rapidly being achieved, and it expects to surpass its original goal. The acquisition of Samsung Corning Precision Materials was completed on January 15, 2014.
LCD glass generates a significant amount of the company's profits and cash flow, and any events that adversely affect the markets for LCD glass substrates could have a material and negative impact on Corning's financial results. The company is subject to strict environmental regulations and regulatory changes that could result in fines or restrictions that interrupt its operations. According to Corning, its ten largest customers accounted for about 50% of its sales. In addition, three customers of the Display Technologies segment accounted for 63% of total segment net sales when combined. A significant decrease in the amount of sales to any of these customers could have a material adverse effect on the financial performance and business prospects of the company.
Corning expects the third quarter will bring its eighth consecutive year-over-year quarterly sales and earnings improvement. Corning has compelling valuation metrics and strong earnings growth prospects; its PEG ratio is only 0.79. Furthermore, Corning has a strong balance sheet, it has total cash of $5.9 billion and its total debt is at $3.69 billion. Corning's quick ratio of 4.00 is one of the lowest among S&P 500 tech stocks. Corning is generating strong free cash flows and returns value to its shareholders by stock buyback and increasing dividend payments, the company was honoring its commitment to return cash to shareholders by doubling the dividend payment and repurchasing 13% of outstanding shares since October 2011.
All these factors bring me to the conclusion that GLW stock is a smart long-term investment.
Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in GLW over 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.