Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Undervalued Companies to Research for the Enterprising Investor. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Corning Inc. (GLW) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Corning Incorporated (Corning), is a global, technology-based corporation. The Company operates in five segments: Display Technologies, Telecommunications, Environmental Technologies, Specialty Materials and Life Sciences. During the year ended December 31, 2011, Corning launched Corning Lotus Glass, an environmentally friendly, display glass developed to enable technologies, including organic light-emitting diode (OLED) displays and next generation liquid crystal displays (LCD). Corning Lotus Glass helps support the demanding manufacturing processes of both OLED and liquid crystal displays for portable devices, such as smart phones, tablets, and notebook computers. During the year ended December 31, 2011, Corning introduced Corning Gorilla Glass 2, the next generation in its Corning Gorilla Glass suite of products. In May 2014, Mitsui Chemicals Inc announced the acquisition of Corning Inc’s SunSensors operations.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 6/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – FAIL
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
- Moderate PEmg ratio – PEmg is less than 20 – PASS
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – FAIL
|Value Based on 3% Growth||$20.78|
|Value Based on 0% Growth||$12.18|
|Market Implied Growth Rate||3.43%|
|Net Current Asset Value (NCAV)||$1.32|
Balance Sheet – 3/31/2014
Earnings Per Share
Earnings Per Share – ModernGraham
Corning Inc. is suitable for either the Defensive Investor or the Enterprising Investor. The Defensive Investor’s main concern at this point is the short dividend history while the Enterprising Investor is concerned with the lack of earnings growth over the last five years. As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities including a review of ModernGraham’s valuation of 3M Company (MMM). As for a valuation, the company appears to be overvalued after seeing its EPSmg (normalized earnings) drop from $2.01 in 2010 to only an estimated $1.43 for 2014. Clearly, this demonstrated drop in earnings does not support the market’s implied estimate of 3.43% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value below the price.
Be sure to check out the previous ModernGraham valuations of Corning Inc. (GLW) for more perspective!
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. What do you think? What value would you put on Corning Inc. (GLW)? Where do you see the company going in the future? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Disclaimer: The author did not hold a position in Corning Inc. (GLW) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. Logo taken from wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.