Buy These 2 Suppliers to Diversify in the Right Tech Market

David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

With demand in technology soaring, investors should start eyeing suppliers. Backing any one end market, like tablets, is risky given how fickle consumers can be. However, diversifying investments can be tricky considering how many markets there are to choose from. Suppliers, however, have already exposed themselves to end markets and, in a sense, done much of the research for you. I recommend considering some of the folloing investments as a way to gain exposure to the undervalued segments of technology.

Corning (NYSE: GLW) & Agilent (NYSE: A): Both Substantially Undervalued

I find both of these electronic-control developers to be both meaningfully undervalued against the fundamentals. Corning recently increased its dividend by 20% - a move that will combat fears over weakening demand. By contrast, Agilent kept its dividend distribution in-line with the previous distribution. Both stocks trade roughly 15% under their 52-week highs and 26% above their 52-week lows, so don't worry about buying one before the others with the expectation of mean reversion.

All things consider, I believe Corning in particular is poised for a strong recovery. As a producer of everything from specialty glasses to glass substrates in LCD TVs, Corning is "King Glass." Its near market reign on glass has enabled it to keep margins high despite a maturing LCD market. No matter, the fundamentals have proven to be remarkably flexible. Bear in mind that Corning got to where it is today due to a necessary shift away from its core fiber optics business, which was hit badly when the dot-com bubble burst.

The focus now on producing glass for smartphones is huge, as it exposes the company to a market where demand is pointing to ever increasing innovation. Gorilla Glass and Willow Glass have been rightfully noted as key catalysts in this market. At the same time, though volumes have been weak, average television size has gone up - resulting in Corning getting more "bang for its buck" in R&D. With the stock trading 7% below book value, and considering the company has a $3 billion net cash position, an investment now comes more or less risk free.

Agilent is also undervalued, but it is considerably more expensive at 13.4x past earnings versus 9.3x. Analysts still rate the stock very favorably at a 1.5 out of 5, where 1 is a "buy." They forecast 11.9% annual EPS growth over the next 5 years, which will yield 2016 EPS of $4.78. At a 17x multiple, this translates to a future stock value of $81.26.

Discounting backwards by 10% yields a present value of $50.46, which is at more than a 30% premium to the current market assessment and more or less in-line with the $47.50 price target. Accordingly, I strongly recommend buying shares now. Keep in mind also that the historical 5-year average PE multiple is 21.2x, so the stock is very discounted at its current level. This is even more odd given the dramatic increase in free cash flow from $449 million for the twelve trailing months ending 2Q 2010 to $1.1 billion in 2Q 2012.

Danaher (NYSE: DHR): "Hold" For Now

While Danaher is also engaged in technology like Agilent and Corning, it is slightly different in that it focuses on the medical and industrial segments. It is also more expensive than both of its competitors at a respective 18.5x and 15.7x past and forward earnings. However, the fundamentals are still strong, and analysts rate it a "buy."

The company is reportedly about to sell Apex Tool to a private equity firm for upwards of $1.8 billion. Second quarter results were generally strong with China seeing increased demand in healthcare for Dental and Life Sciences. Record 2Q EPS of $0.84 was reported - a 31% y-o-y gain. Revenue soared 25% to $4.6 billion and acquisitions, particularly the Beckman Coulter, started to generate tangible synergies.

Going forward, the company has expressed interest in takeover activity. However, the reality is that Danaher has $3.8 billion in net debt and a debt-to-equity ratio of 26.7x. With almost a nonexistent dividend and the stock trading at 2.2x book value, I recommend avoiding the stock for now.


TakeoverAnalyst has no positions in the stocks mentioned above. The Motley Fool owns shares of Corning. Motley Fool newsletter services recommend Corning. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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