Buy Shares In This Turnaround Stock Now
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Technology has long been a popular market on the Street. This has enabled many producers to trade at high multiples under the assumption of high double-digit growth. But what about those that linger in the cheap multiples territory, say, under 10x past earnings? Below, I compare one cheap tech producer against 2 relatively expensive peers.
Corning (NYSE: GLW): A Risky But Attractive Turnaround Play
As one of the most beaten down stocks in diversified electronics, Corning is an ideal play for turnaround artists. It trades at only 8.3x past earnings and is forecasted for only 3.6% annual EPS growth over the next 5 years despite realizing 8.8% annually over the past 5. With a current ratio of 5x, the company also has the financial might to pursue accretive takeover activity and catalyze the bottom-line. Analysts have a price target of $14.69 on the firm, so the potential from creating value off of existing assets is also great. And, just a few days ago, National Securities released a "buy" rating report that gave the glass maker a $16 price target (although down from $16.50 previously).
There are several reasons why I am optimistic on the fundamentals of Corning. First, I believe the reduction in analyst forecasts for LCD sales has been overblown. As the economy improves, TV screen size will increase and help to make up for the depressed number of units that were sold over the last few years. Yes, LCD shipments may have been down slightly over the last few months, but that's not the point. Penetration of LCDs has increased in emerging markets, and this will not only hedge against downside from domestic markets, but also deliver high growth in the years ahead. Second, Gorilla glass has helped improved the company's brand image as a reliable supplier to major tech customers. Morgan Stanley forecasts that this segment alone will grow by the mid-30s in 2012.
If you want to get some diversification, I recommend TE Connectivity as a small high-growth play and Qualcomm as a safe defensive play. TE Connectivity only trades at a respective 12.7x and 9.7x past and forward earnings with a dividend yield of 2.6%. Given the beta of 2x (ie. more than double the volatility of the broader market), TE Connectivity will likely either generate substantial losses or profits for investors.
I believe TE Connectivity is undervalued for several reasons. Aside from the "strong buy" rating on the Street, the diversified electronics producer is forecasted for 9.2% annual EPS growth over the next 5 years. This is more than enough to drive value creation if multiples rise to even just the lower quartile of peer levels. During the third quarter, order momentum ran across nearly all segments, particularly CIS and Telecom Networks. In addition, the company has an attractive balance sheet with debt at less than half of equity and double-digit ROE. I am further optimistic about the synergies that will be derived from the Deutsch acquisition. The integration will add diversified channels and the scale necessary to spread costs.
I believe Qualcomm is safe for several reasons. While the stock is relatively elevated at 19.9x past earnings, it merits this premium, since the company has delivered 13.4% annual EPS growth over the last 5 years despite "the law of big numbers" and a recession. Analysts now forecast that the company will grow 5-year annual EPS by 14.2%. Complemented with a debt-to-equity ratio of virtually 0 and double-digit ROA, ROE, and ROI, Qualcomm has the most metrics pointing in its favor.
Furthermore, Qualcomm will also benefit from 3Q global mobile phone growth of 2.4% y-o-y and smartphone volume growth of 45.3%. This is a dramatic reversal from the previous quarter and indicates a positive reversal for Qualcomm's mobile chip business. Going forward, product innovation, such as the Lumia 510, which is a version of Windows Phone 7.5, will target emerging markets. This will help to establish a solid foundation from which Qualcomm can continue its growth.
TakeoverAnalyst has no positions in the stocks mentioned above. The Motley Fool owns shares of Corning and Qualcomm. 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.