2023-04-27 08:20:00 ET
Summary
- Corning's recent first quarter results leave some things to be desired, but it should see a rebound next quarter.
- Meanwhile, its profitability has improved and its long-term growth thesis remains intact.
- Value investors ought to consider the stock at its current discounted levels for its well-protected and growing dividend and upside potential.
I've learned to embrace market volatility, as that's what creates opportunities. While I don't think the market is stupid, I also believe it's impatient and often short-sighted in what it believes. That's what creates inefficient pricing in the short term and in the words of Warren Buffett, the market is a voting machine in the short run and a weighing machine in the long-term.
This brings me to Corning ( GLW ), which I last covered here back in December, highlighting its attractive valuation and growth prospects. It appears that the market hasn't yet agreed with my thesis, as the stock price has declined by 4.4% (-3.6% total return thanks to dividends) since then.
As shown below, GLW is now again sitting at a trough in its 52-week range (down by 9% YoY since the start). In this article, I highlight GLW's recent quarterly results and discuss why it's now a bargain opportunity with potential for strong total returns.
Why GLW?
Corning has been around for longer than most U.S. companies, with a 170 year track record of innovation in the glass, ceramics, and optical fiber space. More recently, GLW has also been expanding into the medical space with respect to coatings for medical equipment and glass products for drug delivery and diagnostics.
GLW's first quarter top-line results were down by 7% sequentially and down 14% on a YoY basis. This was, however, well communicated by management in the prior Q4 earnings call as supply disruptions and pandemic-related downturn in China weighed on results.
The bright spot, however, is that Corning is willing to sacrifice some near-term growth for better profitability. This is reflected by price increases and productivity improvements, which drove core gross and operating margin by 160 and 150 basis points higher YoY to 35.2% and 15.5%, respectively. As shown below, GLW carries an A- grade for Profitability, with sector leading EBITDA and return on equity of 24% and 11%, respectively.
Looking ahead, management expects the picture to brighten for Q2, with guidance for core sales improving by $0.1 billion to $3.5 billion at the midpoint. They also guide for Core EPS to land at $0.455 at the midpoint, which equates to 11% growth from $0.41 for the first quarter.
Moreover, the long-term growth story for GLW remains intact. This includes GLW's glass technologies having already been deployed in 8 billion devices to date, and it's innovating in emerging technologies such as augmented reality bendable devices and low-loss optical fiber which generated interest at CES earlier this year.
It should also continue to benefit from robust demand from governments and enterprises with respect to optical fiber. In fact, GLW recently opened an optical cable manufacturing campus in North Carolina to support these efforts, as noted by management during the recent conference call :
Government commitments to connect the unconnected are contributing to robust cable and fiber demand, and we continue to advance our leadership. Last month, we officially opened an optical cable manufacturing campus in North Carolina to help provide U.S. network operators with the cable they need to bring high-speed optical connectivity to underserved communities, particularly in rural America.
Commerce Secretary, Gina Raimondo said, "It is past time that every American be connected with affordable Internet no matter where they live. We could not do it without the folks at Corning. We wouldn't have the fiber, the innovation or the cable."
Meanwhile, GLW carries a strong BBB+ rated balance sheet with $5.2 billion worth of cash and short-term investments on hand. Management has also greatly reduced debt in recent years, and the current long-term debt amount sits at $3.3 billion resulting in a negative net debt balance. GLW also has one of the longest debt terms in the S&P 500 ( SPY ) with weighted average maturity of 25 years with no significant maturities in any given year.
This lends support to the 3.5% dividend yield, which is protected by a 52% payout ratio. It also comes with an 11% 5-year CAGR and 12 years of consecutive dividend growth.
Lastly, I view GLW as being solidly in value territory at $32.24 with a forward PE of 16.2. This is considering the quality of the enterprise with very strong balance sheet, and the 12% to 21% annual EPS growth that analysts estimate in the 2024 to 2025 timeframe. Analysts also have a consensus Buy rating with an average price target of $37.76 , implying a potential 21% total return over the next 12 months.
Investor Takeaway
In conclusion, Corning has an excellent balance sheet and delivers robust profitability. While its recent results leave some things to be desired, it should see a decent rebound in the second quarter. All the way, the underlying long-term growth drivers remain intact. As such, patient investors searching for value may want to take a hard look at GLW at its current discounted levels, all while being paid a well-covered and growing dividend.
For further details see:
Corning: I'm Buying The Drop