Corning Is Undervalued And Growing Strongly

Author's Avatar
Mar 19, 2015

Corning (NYSE:GLW) is a leading manufacturer of specialty glass and ceramics, with its products being utilized in a host of different devices such as phones, optical cables, etc. We believe the stock will strongly outperform the S&P 500 over the next 12 months due to its attractive valuation, strong growth profile, bullish stance of "smart money" insiders, and its track record of smashing analyst estimates. Additionally, we feel there are a variety of significant growth catalysts that could propel the stock moving forward that we'll discuss as well. These include the company's aggressive buyback plan, strong levels of R/D spending, and a multitude of industry trends that will benefit certain business segments. As always, we'll conclude our report with a qualitative discussion of these growth catalysts and any business risks.

Before we begin our analysis, investors should beware a little about our analytical style. Our analysis focuses on identifying and exploiting stock market "anomalies." We've identified a variety of different academically tested metrics that have a long track record (over +50 years) of predicting stock returns. We'll provide links to the academic papers that fuel our analysis as we progress through the report so you can see for yourself whether to trust the metrics we rely on. Click here to see detailed breakdown of the prominent academics (many of whom manage billions of dollars) and their contributions to the field of stock research that we draw inspiration from.

Valuation breakdown

We'll start with an analysis of Corning's valuation profile, looking at five valuation metrics each with a strong predictive ability. This is important to look at as Nobel Laureate Eugene Fama showed that "value stocks have higher average returns than growth stocks." The "value" anomaly is the strongest and most consistent edge in the market, as study after study has showed that cheap stocks beat expensive stocks. Corning's valuation profile is shown below:03May20171135111493829311.pngSource

Besides from a revenue basis, Corning looks very attractively valued relative to the market on almost every valuation metric shown above. Corning is a free cash flow machine, trading at an extremely low price-free cash flow multiple of 9.6x. This looks particularly cheap when the technology sector and overall market both trade at over 26x. Corning looks relatively attractive on an earnings and book value basis as well, with an earnings yield of 7.35% (P/E of 13.7) and P/B ratio of just 1.5x. The stock pays a solid dividend yield of 2% and management is in the process of an aggressive buyback plan. Overall, we our algorithms rate Corning as "Strongly Undervalued," and we expect this to contribute to significant outperformance over the S&P 500 over the next 12 months.

Growth breakdown

There is a variety of different growth metrics that have been shown to predict stock returns. Most important among them is price momentum. Winning stocks keep winning (based on six-month price performance), and losing stocks keep losing. As outlined in James O'Shaughnessy's book "What Works on Wall Street", EPS growth and return on equity/assets were also shown to have predictive ability, albeit to a lesser extent. Corning's growth breakdown is shown below:03May20171135111493829311.pngSource

Corning has one of the most consistently strong growth breakdowns we've seen. Corning outperformed the market over the last six & twelve months, gaining 10.9% and 22.3%. This is versus an average of 1.6% and 6.6% for the Electronic Equipment industry group, 5.6% and 6.8% for the technology sector and 3.68% and 5.0% for the overall market. The momentum anomaly is one of the strongest, contrary to common beliefs; it's a very good sign for future returns when recent past returns have been strong. This is especially so when the stock is still undervalued as you get the best of both worlds. Corning has growing EPS at a solid clip, increasing trailing 12-month EPS by 29.1% (versus an average of 14.4% for the industry group). Management is effective, returning 14% on equity and 9% on assets. Both rates surpass the averages for the industry group, sector, and overall market. Overall, our algorithms rate Corning as a "Moderate Growth" stock and expect this growth profile to contribute to solid outperformance over the S&P 500 over the next 12 months.

Earnings breakdown

Next, we'll see how Corning has been performing relative to analyst expectations recently. We've found through historical back testing that stocks that have a history of beating analyst expectations, are much more likely to beat estimates in the future. We've used this earnings model to predict earnings ahead of time on the crowdsourced earnings platform, Estimize. Using this model on over 1,000 quarters of earnings estimates, we've attained a very high analyst confidence score of 8.3/10. This is key as stocks that beat analyst estimates often see big jumps in price, thus it is crucial to have an idea of how earnings will come out ahead of time. Corning's earnings estimate breakdown is shown below:03May20171135111493829311.pngSource

Corning has racked up a strong track record of beating analyst estimates. The company has beaten analyst consensus EPS estimates nine times out of the last ten quarters after beating consensus by 18% last quarter. The company is more mixed on top-line numbers, with last quarter's 4% beat on consensus revenue estimates being only the fifth time in the last ten quarters. Earnings and revenue growth has been very strong, which is key as fast-growing companies tend to beat often (analysts are slow to react). Overall, our model rates Corning as a "Buy" before earnings with the company projected to beat EPS estimates by a very big margin and revenue estimates by a small margin. The company releases in 40 days, with analyst consensus expecting $0.40 in EPS and $2.48 billion in sales.

Qualitative analysis and conclusions

Now that we've analyzed the numbers, it's time to have a qualitative discussion of potential growth catalysts that should continue to propel the stock price moving forward. In December, management unveiled plans for a $1.5 billion share buyback. At current prices, this reflects just over 5% of the company's total market cap, which is a very significant amount. Buybacks reduce the amount of shares in the company thus making it easier for the company to grow EPS moving forward. Additionally, buybacks provide a floor should the stock price experience a significant decline. Not surprisingly, share buybacks have been historically shown to predict stock returns.

With the announcement of Project Phire –Â a scratch resistant glass containing the durability of the Gorilla products –Â its clear that Corning is a leader in innovation. With the surprise news of GTAT Advanced Technologies in October, Corning is the sole U.S.-based competitor left. With the company spending almost 9% of its sales on research and development, the company is one of the highest R/D spenders within the market. With patents growing by 14% year over year, it's clear Corning is doing all it can to maintain its competitive advantage.

Overall, we rate Corning as a "Strong Outperform" and expect the stock to outperform the S&P 500 by a over 10% over the next 12 months due to its attractive value, solid growth profile, and track record of crushing analyst estimates.