I have been watching the performance of Corning (NYSE:GLW) for more than 18 months. Lately, the shares have been badly beaten up by the market because of concerns over competition from a glass company in South Korea, the projected rate of increase of iPhone sales, LCD televisions, and computer monitors. I am thinking that the time might be neigh at which purchasing Corning shares might be a reasonably good long-term investment opportunity.
As of 20th December 2011, the bare price fundamentals are as follows: Price: $12.58; 52-week high $23.43; 52-week low $11.41. If you bought shares in the middle of November 2011, you would have expected to pay in the neighbourhood of $15.04. That means that within a month, you would have lost about 16.4% of your investment value. Also, had you bought shares of Corning a year ago, your loss of investment value would currently stand at 50.9% That sounds really bad, and is if one is considering Corning only as a short-term investment.
Let us dig deeper into the fundamentals: while I do not give much meaning to the ratio, the current P/E stands at 6; the current earnings is $2.25 per share; and, the current dividend is 20¢ per share. This means that Corning is giving a not ugly dividend yield of 2.4% with a current payout ratio of 9% as opposed to a five-year average payout ratio of 8%. In my book Corning performs well on some critical numbers: selling, general, and administrative costs amount to only 13.9% of revenue while research and development amount to 8.5% of revenue. The five-year average rate of growth in research and development spending stands at 4.4%. This represents a healthy rate of increase in spending on an essential part of the business. The SG&A and R&D numbers indicate that Corning recognizes the need to maintain a healthy research and development department whilst placing adequate emphasis on its sales force and administration. The research by Corning has provided it with a deep and broad patent portfolio. That portfolio includes new materials and methods for making those materials from resins to co-block polymers to new fiber optics.
Turning to the debt of the company, we find that the ratio of the long-term debt to the total capital is about 10% while the interest cover stands at an astonishing 39.5. The interest cover is a measure of the ability of the company to make the interest payments on its debt and is computed as EBIT / Net Paid Interest. In general, a prudent investor wants the interest cover to be above 2.
Here is the first critical question: would you buy a one-dollar bill for 91¢? The book value Corning is $13.77 per share and the share price closed on Tuesday at $12.58 per share. That means that the ratio of the price of the share to the book value of the share is 0.91, or 91¢ on the dollar. Now, I am getting interested.
Here is the second critical question: would you purchase a company that gave a yeild of 14¢ per year for every $1.00 invested in its operation? I would, and Corning is one such company.
I stated earlier that I am not particularly interested in the P/E ratio of companies. I am far more interested in the ratio of the enterprise value to the earnings before interest, taxes, depreciation, and amortization. This is because declared earnings can be manipulated to sound better than reality, and often are so manipulated. However, it is difficult to manipulate either the enterprise value or the EBITDA. With Corning, the ratio of EV/EBITDA is 8.92. Although I prefer a EV/EBITDA ratio of 5 or less, I am willing to consider Corning; perhaps, because its Gearing ratio is 0.11, which is considerably less than the upper bound of 0.50 that I find acceptable.
More than three years ago, I adopted an investment strategy whereby I am betting against both the U.S. Dollar and the U.S. Economy. There are two numbers in the fundamentals of corning that please me considerably. The declared domestic sales for the last twelve months is $1,985 MM whilst the declared foreign sales for that same period is $4,647 MM. That is, the declared domestic sales accounted for only 30% of total declared sales.
The downside to Corning is that its year-to-date earnings per share is off 8.2% from the last year-to-date. What is particularly curious about Corning is that its year-to-date revenue is more than 23% higher than the previous year-to-date revenue. One ponders, then, why the earnings are 8.2% lower on an increase of revenue of 23.3%.
There are a few things about Corning that are bothersome to me, so I am not yet prepared to purchase any shares of the company. However, the date of purchase is drawing near.
As always, your comments would be welcomed and appreciated.
Nathan A. Busch