Corning May Break $20, Amphenol Fairly Valued

Includes: APH, GLW, TEL
by: Takeover Analyst

The recent acquisition of Deutsch Group by TE Connectivity (NYSE:TEL) underscores how substantially undervalued companies in electronic instruments and controls are. TEL purchased Deutsch at 10.3x EBITDA. By this multiple, Corning (NYSE:GLW) should be worth $17.98 per share while Amphenol (NYSE:APH) should be worth $55.16 per share. This implies that the companies are trading 42.9% and 26.3% below intrinsic value, respectively.

From a multiples perspective, Corning is incredibly cheap. It trades at only a respective 6x and 7.4x past and forward earnings. The company is an outlier by this measure, as the average PE ratio among peers is 14.9 without Corning and 14 with Corning. Amphenol trades at a more reasonable figure of 14.1x and 13.7x past and forward earnings, respectively. With a dividend yield of 2.4% and a recent board authorization of $1.5B worth of share repurchases, Corning has the appropriate safety that should inspire investor entry.

At the third quarter earnings call, Amphenol's CEO, R. Adam Norwitt, noted strong performance:

"The third quarter was a record quarter for Amphenol with orders and sales again in excess of $1 billion. We are very pleased that despite increased uncertainty in the worldwide economy, we were able to exceed the high end of our guidance in sales and EPS, with revenues growing 9% from prior year and 1% sequentially to a new record $1,033,000,000 and with EPS reaching a record of $0.81, excluding the one-time items. Although we continued to face significant cost challenges in the quarter, the Amphenol management team executed very well in the quarter, achieving industry-leading operating margins of 19.3%. We're particularly pleased that we were able to produce net income of 13.4% of sales, which is a clear indication of the financial strength of Amphenol.

We also generated record cash flow of $184 million, which was used in part for the continuation of our stock buyback program".

The problem with Amphenol, however, is that the company is unlikely to expand its multiple due to impending defense cuts and supply chain disruptions. The firm will face charges for the Sidney plant flooding in the fourth quarter - repairs costing around $7M pre-tax. (Note, however, that local governments have paid Amphenol $20M to not relocate). Organic revenue growth is also anticipated to reach a low in the fourth quarter and less ordering is expected in aerospace and defense. The company appears focused on an M&A strategy, which may constitute approximately one-third of growth.

Consensus estimates for Amphenol's EPS are that it will grow by 12.2% to $3.03 and then by 4.6% and 11% more in the following two years. Assuming a multiple of 14x and a conservative 2012 EPS of $3.13, the firm is fairly valued. It currently is rated a "buy" on the Street.

Corning, in my view, has unreasonably depreciated more over the last 1 year period. Gorilla glass has yet to be fully appreciated by the market and Dow Corning is dominant in polycrystalline silicon. Although the industry faces risks from dramatic inventory fluctuations, Corning has held up well. Even in a challenging environment, the technology company managed to have record EPS of $1.96 in the third quarter, which represented a 20% y-o-y growth. Corning has further expanded into emerging regions and slashed operational costs - actions that the market has undermined due to macro concerns. As the economy recovers, Corning is in a strong position to benefit from the expected substitution towards LCD-TVs and quicker replacements (see here).

Consensus estimates for Corning's EPS are that it will decline by 14% to $1.78 in 2011, decline by 3.9% in 2012, and then grow by 2.3% in 2013. Assuming a multiple of 12.5x - still well below the peer average - and a conservative 2012 EPS of $1.64, the rough intrinsic value of the company is $20.50, implying 63% upside. Only if the multiple were to expand to just 8x and 2012 EPS turns out to be 8.2% below the consensus would the company be fairly valued. Accordingly, I recommend a "strong buy" for Corning.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GLW over the next 72 hours.

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