In an earlier article here, I argued that Corning (GLW) had substantial upside far beyond what the market is acknowledging. Since then, the stock has beat the Dow by 366 bps at a return of 7.4%. Another peer tech company, TE Connectivity (TEL), is also attractive. Based on a multiples analysis, complemented by DCF modeling, these companies evidence a meaningful discount to intrinsic value.
From a multiples perspective, Corning is substantially the cheaper of the two. It trades at a respective 6.7x and 8.3x past and forward earnings while TE Connectivity trades at a respective 12.3x and 9.2x past and forward earnings. In addition, Corning is also safer and less volatile, as indicated by its beta being only 70% that of its competitor. Even still, Corning is rated a "hold" while TE Connectivity is rated a "strong buy." While I do not take exception with TE Connectivity receiving that rating (indeed, I agree with it), I believe that Corning also merits such recognition. In light of PPG Industries (PPG) trading at a respective 13x and 12.3x past and forward earnings, both firms have room for multiples expansion.
On the fourth quarter earnings call, TE Connectivity's CEO Tom Lynch noted strong performance:
"This was a good quarter for the company and a strong finish to our fiscal year. Sales in the fourth quarter of $3.9 billion were up 25% overall versus last year and were up 2% organically and, as a reminder, this excludes currency translation acquisitions and about $277 million in sales that happened in the last week, which was the 14th week in the quarter.
Our Q4 growth was driven primarily by our transportation and network segments. In the transportation segment, we're benefiting from strong end markets and share gain. In automotive, worldwide vehicle production was up 6% and our sales were up 13% organically. I am really pleased that we continue to execute very well in this business across all geographies, especially China and North America."
The fears over integration risk has also proved to be overblown. ADC added an impressive $323M to revenue, greatly benefiting the end-to-end product line. The recent purchase of Deutsch Group at 10.3x EBITDA will further unlock revenue synergies. Since a spin-off in 2007, the tech company has worked to restructure itself. Selling off six units at $1.2B and focusing on core product areas has positioned TE Connectivity for a recovery. While management has improved margins, customers still have strong bargaining power and the company is overly focused on less profitable consumer end markets compared to, say, Amphenol (APH). With that said, 500K worth of products well diversifies the company.
Consensus estimates for TE Connectivity's EPS are that it will grow by 4.8% to $3.27 in 2011 and then by 15.3% and 13.8% more in the following two years. Assuming a multiple of 13x and a conservative 2012 EPS of $3.67, the rough intrinsic value of the stock is $47.71, implying 37.5% upside. Modeling a CAGR of 11.2% and discounting backwards at a WACC of 9% implies an even higher fair value, $54.48. Accordingly, the company merits its "strong buy" rating.
If TE Connectivity has so much potential at higher multiples then surely Corning is more than a "hold." From catalysts in Gorilla glass to market domination in polycrystalline silicon, Corning is a clear "strong buy" in my view. The company is well positioned to benefit from substitution toward LCD-TVs and technical indicators point upwards after the loss of one fourth of its value for the year. Volumes may be down by 20%, but this is still 1,000 basis points higher than expected. With a strong brand name and substantial cash holdings, Corning is also an attractive defensive play; thus, providing the best of both worlds.
Consensus estimates for Corning's EPS forecast that it will decline by 14% to $1.78 in 2011, decline by 5.1% in 2012, and then grow by 2.4% in 2013. Assuming a multiple of 12.5x and a conservative 2012 EPS of $1.654, the rough intrinsic value of the stock is $20.50, implying 44.4% upside. Even if the multiple were to be 9x and 2012 EPS turns out to be 15.4% below consensus, the stock would fall by only 9.4%. In a buy-and-hold play, the multiple is bound to expand and skyrocket value.