|Corning Still an Up-and-Comer |
A multiyear TV-replacement cycle will boost earnings power.
Corning (GLW: NYSE)
By Susquehanna Financial Group ($20.06, March 26, 2014)
We are increasing estimates and the price target on Corning, and upgrading shares to Positive from Neutral.
Recent industry data points and Taiwan/Korea meetings last week have all been positive for Corning's GLW) TV operations, attributed to an improving economy/declining 4k2k (ultra-high-definition) premiums. We also hosted management meetings in New York Tuesday, with takeaways supportive of stronger earnings-per-share/free-cash-flow growth.
We are therefore increasing estimates and the price target and upgrading, despite Corning stock at a 52-week high. We argue share appreciation the past six months has had more to do with accelerated buy backs. And improving fundamentals should help with more upside from here especially as earning power improves (fueled by a multiyear TV-replacement cycle, margin expansion) while there is incremental confidence on free-cash-flow margin of 15% to 20%. The glass industry could also consolidate given poor balance sheets among competitors, helping with multiple expansion (recall the semiconductor-memory industry!). We are not as concerned on [manufactured] sapphire [a product that competes with Corning's Gorilla Glass] as we are with exchange rates though Corning is hedged through first-quarter 2015.
Given our revised view on fundamentals, we are using this opportunity to increase the calendar 2014 EPS estimate from $1.42 to $1.50 (consensus estimate is $1.45). Additionally, given our view that this is a multiyear TV-replacement cycle, we are using this opportunity to introduce our calendar 2015 EPS estimate of $1.75 (consensus estimate is $1.63). This has led us to increase our price target from $15 to $25, which is based on 14 times estimated calendar 2015 EPS, three times enterprise value (EV)/sales, nine times EV/earnings before interest, taxes, depreciation and amortization (Ebitda) and 1.7 times current book value.
The stock has over the past five years traded in a range of seven times-15 times forward price/earnings. The closest peer groups (LG Chemical [of Korea], Asahi Glass [of Japan]) are currently trading at 15 times forward price/earnings, one times EV/sales, five times forward EV/Ebitda and one times book value. We note Corning as of fourth-quarter 2013 had a net positive cash per share of $1.36 versus negative $4 for Asahi and negative $15 for LG Chemical.