This is the third and last post of a three part article. Part I introduced the two companies and Part II discussed Deckers Outdoor Corp. (DECK). This article will focus on Corning, Inc. (GLW).
We'll start again by laying out GLW's Owners Earnings for the last ten years.
2002 | 2003 | 2004 | 2005 | 2006 |
$ (668.0) | $ (55.0) | $ (2,388.0) | $ (357.0) | $ 1,482.0 |
2007 | 2008 | 2009 | 2010 | 2011 |
$ 1,803.0 | $ 4,261.0 | $ 2,091.0 | $ 3,654.0 | $ 1,496.0 |
From 2002 to 2005, Corning spent more cash to run and maintain the business than they received from business operations. The rest of the years the company was able to generate more cash than what it cost to keep the doors open. For comparison, here are the net earnings figures that GLW reported on to the street in the same periods.
2002 | 2003 | 2004 | 2005 | 2006 |
$ (1,780.0) | $ (223.0) | $ (2,185.0) | $ 585.0 | $ 1,855.0 |
2007 | 2008 | 2009 | 2010 | 2011 |
$ 2,150.0 | $ 5,257.0 | $ 2,008.0 | $ 3,558.0 | $ 2,805.0 |
In my opinion, 2005 is the most telling year. Despite reporting to the street that the company had net income of $585M, the company actually cost its share holders $-357M. Think about it this way, if GLW were a private company owned by only one person, the owner would have had to take $357M out of the bank to keep the doors open. Regardless, in the past six years, we can see that Corning has been doing quite well for itself.
Here are the Owners Earnings graphed next to the equity:
(Click to enlarge)
As with DECK, we see a nice upward trend to the equity. While Owners Earnings haven't been as stable as DECK, they are still relatively easy to predict based on relative history. Keep in mind that most companies are all over the place when you look at this type of graph. I only like to invest in a company with a trend such as this because it makes forecasting much more predictable.
I am going to go further in this article and present a simple forecast that you can pick apart. Let's assume that GLW grows their Owners Earnings by a -5% in 2012 and then by 0% in 2013 and then by 15% in 2014. From 2015 to 2021, I am going to reduce the Owners Earnings little by little each year from the 15% in 2014 and end at 5%. Then from 2022 to 2031, I am going to the stick with the 5% growth. I'll then use excel to figure out the present value of each year's owners earnings and discount the value to today assuming a 15% discount rate.
My calculations tell me that the value or Corning is really $43.6B or about $28.50 per share. The current market cap is about $21.8 and the current stock price is about 13.62. However, I admit that I cannot precisely predict the next 20 years of the business cycle. Yet I feel confident in these numbers because as Keynes said, "It is better to be roughly right, then precisely wrong". (For the record, I always like Mises and Hayak much more than Keynes.) Since I know that I am roughly right and not exactly right, I must demand a margin of safety. Sticking with the 15% discount rate allows me to demand a 25% discount for a company of this size. The actual margin of safety comes in at over 50% which is why I own the stock and will be buying more.
Wall Street is not a place for anyone with a week stomach. It may take years for the stock price to catch up with the value of the company. You have to be able to completely tune out the news headlines and stick with it through the volatility. If you're able to do this, I think GLW could be a worthwhile investment.
What are your thoughts?
Disclosure: I am long GLW.
