Despite low multiples and a strong brand name, Corning's (GLW) stock has gone up and down with virtually no net gain in either direction. In my view, however, the company continues to be a bargain at current levels when factoring in reasonable growth expectations. For a firm that has an impressive quick ratio of 5 (indicating liquidity is not tied up in inventory) on top of a 2.3% dividend yield, too much risk is being factored into the present valuation.
Based on annual EPS growth of 4.6% over the next five years, 2016 EPS will be around $1.82. At a 13 times multiple, the future value of the stock is $23.66. Discounting by 10% yields a present value/price target of $14.69. This is not an incredible margin of safety; but, then again, 4.6% per annum growth is overly bearish.
At Infocomm 2012, Corning recently unveiled its large-sized Gorilla Glass, which is ideal for touch-sensitive screens. The electronics supplier partnered with Perceptive Pixel to deliver the solution that is well-positioned to feed growing demand for improved usability in mobile devices. Corning may be a very volatile stock, but it remains the leader in its field and has access to demand well before the rest of the market. With the Street optimistic about technology's positive secular trends, it is a mystery why Corning is worth below book value. It is only a matter of time before investors look beyond fear -- prosperity is around the corner.
Consensus estimates forecast its EPS declining by 22.7% in 2012 and then growing by 11.8% and 2% in the following two years. Assuming a multiple of 13 times and a conservative 2013 EPS of $1.48, the stock would hit $19.24. With the downside fairly limited given the low multiples, I believe the company has compelling risk/reward.
Nevertheless, there are safer alternatives that are also attractive: 3M (MMM) and Danaher (DHR). Conglomerate 3M trades at a respective 14.8 times and 12.9 times past and forward earnings vs. corresponding figures of 18.1 times and 14.1 times for Danaher. The Street is much more optimistic about the latter, according to data sourced from Finviz.com, but I see a strategic play in the former unlocking considerable value. Particularly, the firm should consider selling off irrelevant business or splitting. Similar actions by conglomerates have seen strong returns, and 3M maintains a business that few understood. While the fundamentals may be great, if the Street never recognizes the value, it is all for naught. Separating business into logical units that offer cross-selling opportunities will reduce risk discounting and thus boost shareholder value.
In my DCF model on 3M, I attempt to find the conglomerate's intrinsic value. I assume (1) 10.5% per annum growth over the next six years and (2) 2.5% into perpetuity, (3) a 10% discount rate, and (4) consistent operating metrics. Based on these assumptions, I find that the stock is worth nearly $100. This comes on top of record sales and momentum across segments ranging from healthcare to consumer and office. Performance in America has been strong while Western Europe has done much better than what many had expected.
In the meanwhile, Danaher will remain a more attractive investment than 3M. Despite offering a dividend yield of 0.2%, the firm is a relatively safe tech company in light of how it is slightly less volatile than the broader market. EPS is expected to grow annually by 14.9% over the next five years. That means 2016 EPS of around $6.43. Assuming a multiple of 15 times, the future value of the stock is nearly $100. At a 10% discount rate, the price target is $59.85. Again, this is not incredible upside at a 2 times price-to-book ratio. A multiple of 17 times, however, would boost the price target to $67.87 for 30% upside. Given how expensive the firm is relative to Corning, I solidly recommend an investment in the latter.
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