Buy Corning, TE Connectivity, 3M: An Ideal Value-Growth Combo

Includes: GLW, MMM, TEL
by: Takeover Analyst

Glass-maker Corning (GLW) is probably one of the most controversial and riskiest, yet hottest, stocks on the Street. It trades at only a respective 7.7x and 8.2x past and forward earnings, but the bottom-line has shown signs of deterioration. After growing EPS by 8.8% annually over the past 5 years, analysts expect nearly just half that amount over the next 5. In light of how the past 5 years contained the worst global economic downswing since the Great Depression, I find that analyst expectations have set the bar rather low. TE Connectivity (TEL) is a peer of slightly less, but similar, risk. 3M (MMM) may have less volatility and greater dividend yield than both, but this greater safety comes with less of a discount to intrinsic value. Below, I review the fundamentals of each company.


Corning is currently rated around a "hold" on the Street according to data from Asahi Glass of Japan lowered guidance for both EBIT and the toppling of the 1H12 and 2012; but, this doesn't suggest much for Corning, since much of the macro weakness has been factored into the stock. Moreover, Asahi's weak performance in European architectural glass and solar systems has little to no relevance for Corning.

TV demand has been weak; but, again, the market has already been made aware of that trend quarters ago. As a whole, the LCD business is declining in size, and Dow Corning JV has been largely tarnished due to poor re-negotiations with solar customers in long-term contracts.

There is reason to be optimistic. Average LCD average screen sizes have gone up to a record 36.5'' in 1Q12 from 36.1'' in 4Q11 - continuing a positive secular trend. Gorilla glass remains a major catalyst with 190% growth in 2011 and around 35% in 2012. Negotiations with Korean customers can also set Corning on a strong path towards emerging market penetration. With the stock valued at 12% below book value and a quick ratio of 5, Corning is both undervalued and equipped with the cash necessary to launch accretive takeovers.

TE Connectivity

Like Corning, TE Connectivity is engaged in the electronic instruments and controls industry. The stock is more expensive but still cheap at a respective 11.4x and 8.9x past and forward earnings. At the same time, the dividend yield of 2.7% is reasonable. Analysts currently rate the stock a "buy" with a price target of $40.57, which is at a more than 30% premium to the current market value. While I also recommend TE Connectivity as a means to diversify in technology, I prefer Corning for its lower multiples and turnaround potential.

TE Connectivity has faced softer demand in several areas. Weaker auto trends and industrial growth in Europe will put downside pressure on multiples expansion. Inventories are also high while export markets are slowing - a deathly combination that will keep prices low. Telecom spending has been frozen and, to the extent that this affects Corning, it hasn't affected TE Connectivity enough.

At the same time, the firm also has meaningful value drivers. The reintroduction of a more aggressive buyback program would help re-excite back investors wary about dividend tax hikes. Growth has also not been reasonably factored into the stock price. If the company manages to boost EPS just 5% annually - nearly half of what is expected over the next 5 years - it will achieve 2016 EPS of around $4.03. At a 15x multiple, the future value of the stock would be $60.45. Discounting backwards by an aggressive discount rate of 12% would put the present value at $34.30 - still a premium to market value. Accordingly, more of the bear case than the bull case has been factored into the stock price.


3M is safer than both Corning and TE Connectivity with 13% less volatility than the broader market and a strong brand name. Perhaps for the same reason, the company is also valued at a premium to peers with a 14.7x PE multiple. 3M is nevertheless a decent investment with double-digit ROA, ROE, and ROI. According to, analysts currently rate the company a 2.6 out of 1 to 5 scale with 1 being a "buy" and 5 being a "sell".

The thing to note about 3M is that it is large conglomerate and, in my view, the business is so complex that few understand the value of each individual segment. I believe the company should consider spinning off slowing segments, like other conglomerates, have done and focus more on technology. A breakup altogether would help investors better allocate risk and value the assets.

In the foreseeable future, 3M is expected to accelerate growth in 2H12 from strengthening end markets. The emergence of new CEO Inge Thulin is unlikely to induce a major change in strategy, but it will probably improve priorities. Accelerating top-line momentum, coupled with excellent ROIC, make 3M an attractive growth investment. From historically strong financing to a global footprint and successful R&D efforts, 3M is tuned more for an upside than a downside story. While it may not have as much upside as TE Connectivity and Corning due to its degree of safety, 3M nevertheless offers a meaningful defense against an uncertain economy.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: We seek IR business from all of the firms in our coverage, but research covered in this note is independent and for prospective clients. The distributor of this research report, Gould Partners, manages Takeover Analyst and is not a licensed investment adviser or broker dealer. Investors are cautioned to perform their own due diligence.