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Corning Is Not A Buy At Present, Despite 5G Prospects

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About: Corning Incorporated (GLW)
by: Cash-Centered Creep
Cash-Centered Creep
Dividend growth investing, dividend investing, long-term horizon
Summary

Corning's 5G prospects and partnerships with Intel and Apple put it in a good position.

It has a strong balance sheet and healthy revenue figures.

Despite this, its growth prospects and current valuation are a concern.

Corning Incorporated (GLW) seems like a decent play on 5G, and it is a well-capitalized firm. However, despite its advantages, its prospective growth and its current valuation are factors that go against it being considered as a prospective investment.

There will be bulls that will dispute this (and the comments section will no doubt display this), and to be fair, there are good grounds for dispute. 5G looks set to be a major factor for Corning going forward. In October, a strategic partnership with Intel (INTC) was announced, the purpose of which is the provision of 5G infrastructure in commercial offices. The high-speed fiber optic material that will be used will be manufactured by Corning.

Corning's partnership with Apple remains strong, as the latter's recent $250 million investment in the former illustrates. Image provided by Industry Leaders.

In addition, Corning retains a strong partnership with Apple (AAPL). In September, Apple invested $250 million from its Advanced Manufacturing Fund into Corning for glass used in products such as iPhones, iPads, and Apple Watches. This amount exceeds the $200 million investment that Apple had made into Corning in 2017. These two factors should enable Corning to continue posting healthy revenue figures, as they have over the past five years.

Year Revenue ($) Net Income ($)
2014 9.71 billion 2.47 billion
2015 9.09 billion 1.34 billion
2016 9.39 billion 3.7 billion
2017 10.12 billion -600 million*
2018 11.29 billion 1.07 billion

Figures collated from annual reports available on Corning's investor relations page.

*Loss attributed to a combination of weaker glass volumes and tax law changes.

Quarterly figures in the present financial year give further optimism of this trend continuing.

2019 Quarter Revenue ($) Net Income ($)
Q1 2.81 billion 499 million
Q2 2.94 billion 92 million
Q3 2.93 billion 337 million
Total 8.68 billion 928 million

Figures collated from quarterly reports available on Corning's investor relations page.

Corning's earning potential should also ensure that its balance sheet remains healthy for the foreseeable future. Long-term debt of $6.67 billion is offset by a net worth of $13.13 billion, and total current liabilities of $3.6 billion are offset by total current assets of $6.16 billion, cash-on-hand worth $971 million, and total accounts receivable of $2.02 billion. Furthermore, with a payout ratio of 54.40%, Corning should also be able to sustain the record of paying consecutively rising dividends to shareholders that it has established over the past eight years.

Despite all these strengths, there are a couple of factors that prevent me from wholeheartedly recommending Corning as a buy. EPS growth over the next five years is estimated to be 6.74%, and one of the reasons for this was highlighted by Corning itself in September, when it advised lower-than-anticipated demand for television display glass and fiber-optic cable products, a drop in demand that was attributed to reduced customer spending.

The reaction to this from Mr. Market was swift - on September 17, 2019, Corning's stock fell 7.2% and other analysts pointed to other issues: Citigroup (C) stated that macro conditions for Corning had gotten worse, and the benefits to be derived from 5G investment "have not kicked off yet in full force to offset declines in fiber." George Notter of Jeffries noted that it was the second cut in expectations for display, and that "we see scope for further fundamental pressure on the business as the implementation of tariffs create a drag in the industry."

Corning is currently trading around $30 per share. Chart generated from FinViz.

Notter had cut his price target from $29.50 to $27, yet currently, Corning trades at a share price of $30.11 with a price-to-earnings ratio of 22.47 and a dividend yield of 2.66%. The current P/E is higher than the five-year average P/E of 16.99 and the current dividend yield is higher than the five-year average dividend yield of 2.27%. This rather mixed picture makes it important to determine fair value for Corning.

To determine fair value, I first divide the current P/E by the historical market average of 15 to get a valuation ratio of 1.50 (22.47 / 15 = 1.50), and then divide the current share price by this valuation ratio to get a fair estimate for fair value of $20.07 (30.11 / 1.50 = 20.07). Then I divide the current P/E by the five-year average P/E to get a valuation ratio of 1.32 (22.47 / 16.99 = 1.32), and then divide the current share price by this valuation ratio to get a second estimate for fair value of $22.81 (30.11 / 1.32 = 22.81).

Next, I divide the five-year average dividend yield by the current dividend yield to get a valuation ratio of 0.85 (2.27 / 2.66 = 0.85), and then divide the current share price by this valuation ratio to get a third estimate for fair value of $35.42 (30.11 / 0.85 = 35.42). Finally, I get the average of these three estimates to get a final estimate for fair value of $26.10 (20.07 + 22.81 + 35.42 / 3 = 26.10). On the basis of this estimate, Corning is currently trading 15% above fair value.

In summary, there is much to like about Corning - its strong partnerships with Intel and Apple, its strong revenue figures, its above-average balance sheet, its dividend record, and its 5G prospects. Yet the below-par projected growth and the factors which have led to it - lower demand for products and tariff issues - means that it would be preferable to get Corning at a discount to fair value, which is not on offer at present. It is a hold, certainly, but not at this time a buy.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.