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Has Corning Become Too Expensive Now?

- By Ishan Majumdar

Corning Inc. (GLW) is a leading global player in the manufacture of specialty glass and ceramics. The company's core products are used across a variety of segments such as LCD televisions, desktop monitors, mobile phones, fiber-optic cabling, and other material science products. The company has its headquarters in Corning, New York but it generates most of its revenues from the Asia-Pacific region.


A year of ups and downs

The past 12 months have been full of ups and downs for Corning. There were two bad quarters when the company reported a net loss and negative free cash flows, causing the stock price to plummet below $30. However, the result for the last quarter was stellar, and the stock price has shot up above the 52-week high of $35 and consistently traded above this level. The big question that investors are asking is: Can Corning keep going up? Or is it already too expensive?

Corning: a yield stock

Corning has traditionally been a yield stock that is the ideal for the long-term, retiree investors. As a part of the management's strategy and capital allocation framework, which was announced about three years ago, it has already returned around $10 billion to investors through dividends and buybacks. The dividend yield of the company has been above 2%, and the overall yield for investors including buybacks has also crossed 10% in some years.

But the recent spike in the stock price might result in a significantly lower yield for new investors entering at the current levels. Hence, it is important to analyze the management's future initiatives to see if the stock has potential for capital appreciation.

Promising future initiatives by management

Expansion for the future has been the main focus of the management and it is evident from some of the recent announcements from the company. They recently completed the acquisition of the communication markets division of 3M Co. (MMM) with the objective of growing the portfolio's optical solutions and extending the reach of its optical communications business to important markets such as Europe, the Middle East, and Latin America.

The company also started a new plant in Hefei, China, in order to produce a higher grade of LCD glass to provide a boost to its display technologies division. Among its other initiatives is the steady expansion of the use of Gorilla Glass. The application of Gorilla Glass is further being extended to other industries such as automobiles. Corning is in the process of working with many automobile manufacturers to equip automobiles with Gorilla Glass for both interior and exterior use.

Last, the management is also focusing on manufacturing Valor Glass, a product aimed at the pharmaceutical industry. This glass is expected to eliminate cracks and breaks in medicine packaging and reduce the wastage for pharmaceutical companies. The project is steadily receiving approval from large pharma giants too.

The current valuation is not a bargain

If we look at the 10-year chart of Corning, one point that can be safely concluded is that it has been a cyclical stock. The high yield through dividend and buybacks has obviously compensated for the price fluctuations, but the smartest investors of Corning are the ones who invested at its lows, and right before its previous result that caused the spike above $30.

The key financial metrics per GuruFocus are decent. It operates at a net operating margin of 13.48%, which is well above the industry, but the net margin and the return on equity are negative. This is expected to change over the years as the new management initiatives start providing results.

From a valuation perspective, it is evident that Corning is trading on par with industry peers. The company's price-sales ratio is 3.23, which is slightly on the higher side, along with a price-earnings ratio of 35.77. The EV to Ebitda ratio is around 12.09. All of these multiples indicate that Corning is not undervalued by any standards. Its current levels are fair and probably even somewhat expensive given the negative net margin.

Conclusion

Corning may have had its share of ups and downs but, fundamentally speaking, the company isn't bad. Management is investing heavily in the future of the business, and there are a number of promising initiatives by the team that could improve the yields for investors in the future.

Yet, the current levels of the stock are not cheap, especially for yield investors. Corning was an ideal buying candidate before its previous results at a level below $30, but its valuation multiples are on the higher side now.

While existing investors can confidently hold on to the stock, it is important for potential investors to keep this company on their watchlist and monitor all the news associated with the growth of the display technologies business, particularly Gorilla Glass, the specialty materials side, and updates with respect to its earnings and future acquisitions. The stock could be a decent yield bet if it falls closer to its $30, but the current valuation is certainly not a bargain for long-term investors.

Disclosure: No positions.

This article first appeared on GuruFocus.