Communication Stocks To Consider Buying

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

If you are looking to invest in electronic component producers, it is easy to be compelled with all of the tech innovation from smartphones to even laptop computers. In an industry like this, I recommend looking at growth trends and return on invested capital to see if companies are building value from their initiatives. Below, I review Corning and TE Connectivity with this in mind.

Corning (NYSE: GLW) Looks Undervalued

Many see Corning as a crash and burn stock. In 2010, income after taxes amounted to $3.558 billion. In 2011, it was down to $3.213 billion. Although return on invested capital dropped by 30 bps during this period, it still stands on 18.6%, which means Corning is creating value in light of a lower weighted average cost of capital. While ROIC may be below the S&P 500's, it is around 30 bps higher than the industry's. And at only 0.77x, the value creation has yet to be appreciated by the market.

Investors are just starting to catch on. After Corning boosted its guidance ahead of a conference call with analysts, the market pushed shares 8% higher. Stronger-than-expected demand for TVs and normalization of pricing trends were the main catalysts. Management is guiding for a 5% sequential gain in specialty materials from Gorilla glass. And investors also have Willow glass to look forward to the tailwind from Samsung producing flexible OLED displays in the first half of 2013.

With a dividend yield of 3.2%, a clean balance sheet (quick ratio: 4.3x), and low multiples, Corning also has limited downside. 38% of its market cap is backed by straight cash, and analysts are highly bullish on the stock. National Securities rates it a "buy" with a $16 price target, as does Oppenheimer. Stifel Nicolaus is only slightly less bullish with a price target of $15. As the economy recovers, Cornings remains a highly compelling stock to buy.

TE Connectivity (NYSE: TEL) Also A "Buy"

Analysts are also calling TE Connectivity a "buy". It trades attractively at a respective 12.9x and 9.6x past and forward earnings. It generates a return on capital of 11.3%, which is also head of the industry’s. Between July 2011 and April 2012, the mean analyst rating has steadily weakened from a 1.62 to 1.85 on a 1-5 scale where "1" is a buy". In terms of growth, it is strong in its industry at a PEG ratio of 0.79x and forecasts for 14% annual EPS growth. By contrast, the electrical components industry is only forecasted for 9.4% annual EPS growth.

Management has also taken the appropriate steps to build value. The decision to sell two business units for $400 million in April 2010 and purchase Deutsch Group to improve exposure to defense & industrials. TE Connectivity's price-to-book ratio of 1.6x is unreasonably below the sector average of 3.9x when its net income growth has been, and is expected to be, much faster.

By contrast, PPG Industries (NYSE: PPG), which specializes in glass and is exposed to the low multiple chemical market, can trade at 4.9x book value. It is still rated a "buy" on the Street and has risen around 60% from the 52-week low. Analysts forecast it growing EPS by 9.3% annually over the next 5 years. Assuming expectations are met, 2016 EPS will come out to $10.03. At a multiple of 15x, this translates to a future stock value of around $150.50, or $93.45 in present terms (using a 10% discount rate). This means PPG is around 25% overvalued. I believe that this stock will thus depress while TE Connectivity will see multiples elevate.

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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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