Corning, TE Connectivity Have 20% Upside Or More

| About: Corning Inc. (GLW)

Corning (NYSE:GLW) and TE Connectivity (NYSE:TEL) are both rated highly on the Street. According to T1 Banker, TE Connectivity is preferred at a "strong buy" versus a weak "buy" for Corning. Based on my review of the fundamentals and multiples analysis, I find that Corning will outperform given the value of its catalysts.

From a multiples perspective, Corning is the cheaper of the two. It trades at a respective 7.8x and 9.2x past and forward earnings with a dividend yield of 2.2%. TE Connectivity, meanwhile, trades at a respective 12.8x and 10.2x past and forward earnings. To put this under more context, consider that Corning is valued at only 76% of its historical 5-year average PE multiple!

At the fourth quarter earnings call, TE Connectivity's management noted disappointing performance:

Q1 was a slow start to the fiscal year for us. We anticipated a slow start but it was softer than expected. Sales in the first quarter of $3.3 billion were up 3% overall versus last year and were down 3% organically and this excludes currency translation and the ADC acquisition and the sales level was about 3% below guidance range and I'll come back to this in a minute.

Adjusted earnings per share were $0.66, $0.04 below the midpoint of our guidance range driven by the revenue shortfall. Free cash flow was $85 million in Q1 which is in line with our expectations and orders were $3.2 billion in Q1 with a book-to-bill excluding our SubCom business of 0.98.

The first quarter miss represented a 15.4% sequential decline in revenues with EPS 5.7% below consensus. Management guided fro a further 2.9% sequential decline in revenues (based on mid-point of range), but revisions are likely to be made upwards given several factors. First, the firm's book/bill ratio is greater than 1. Second, order trends meaningfully improved in January. Investors appear to be overly discounting the fundamentals due to the fact that one-third of business comes from Europe. But with destocking headwinds likely to dissipate by 3Q and leverage being reduced, the company is well prepared to prosper during a recovery. Net debt of $1.5B is estimated to turn into a net cash position of around $550M by 2014.

Consensus estimates for TE Connectivity's EPS forecast that it will decline by 3.5% to $3.01 in 2012 and then turnaround to grow by 17.3% and 11.6% in the following two years. Assuming a multiple of 12.5x and a conservative 2013 EPS of $3.47, the rough intrinsic value of the stock is $43.38, implying 20.5% upside.

Corning similarly had disappointing recent quarterly performance. Poor profit momentum for panel makers drove pricing trends down. Even still, gross margins still beat consensus at 43.7%. The fundaments, moreover, are still strong. Corning Gorilla Glass, a major catalyst, nearly tripled y-o-y in revenues. The firm delivered positive free cash flow for the eighth consecutive year and continues to innovate in order to prosper from a recovery.

Consensus estimates for Corning's EPS forecast that it will decline 21% to $1.39 in 2012, grow 9.4% in 2013, and then hold flat in 2014. Assuming a multiple of 12.5x and a conservative 2013 EPS of $1.45, the rough intrinsic value of the stock is $18.13, implying 31% upside.

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