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 Most Undervalued Companies for the Defensive Investor – May 2015. 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 engaged in the manufacture of specialty glass and ceramics. The Company operates in five segments: Display Technologies, Optical Communications, Environmental Technologies, Specialty Materials and Life Sciences. Its Display Technologies segment manufactures glass substrates for flat panel liquid crystal displays. Optical Communications segment manufactures carrier network and enterprise network components for the telecommunications industry. Its Environmental Technologies segment manufactures ceramic substrates and filters for automotive and diesel applications. Specialty Materials segment manufactures products that provides material formulations for glass, glass ceramics and fluoride crystals. Life Sciences segment manufactures glass and plastic labware, equipment, media and reagents. iBwave Solutions, Inc. is a wholly owned subsidiary of Corning and operates under its Optical Communications business segment.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7
- 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 – FAIL
- 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||$21.31|
|Value Based on 0% Growth||$12.49|
|Market Implied Growth Rate||2.99%|
|Net Current Asset Value (NCAV)||$0.87|
Balance Sheet – March 2015
Earnings Per Share
Earnings Per Share – ModernGraham
Corning Inc. is suitable for the Enterprising Investor but not for the Defensive Investor. The Defensive Investor is concerned by the short dividend history, and insufficient earnings growth over the last ten years, while the Enterprising Investor is only concerned by the lack of earnings growth over the last five years. As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research and comparing the company to other opportunities. From a valuation side of things, the company appears to be overvalued after seeing its EPSmg (normalized earnings) drop from $1.98 in 2011 to only an estimated $1.47 for 2015. This level of demonstrated growth does not support the market’s implied estimate of 2.99% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value falling below the price.
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 any 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.