2 Undervalued Tech Suppliers to Buy

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

With a dramatic secular transition towards smartphone and tablet technology, firms like Corning face great upside. While they have partially recovered lost shareholder value from improving momentum, the market correction hasn't been strong enough. There are several reasons why I find them to be undervalued and capable of outperforming in the next two years. Below, I present my take on the two.

An Improving Outlook For Corning (NYSE: GLW)

This maker of glass and other electronic supplies has recovered 20.6% from its 52-week low, but still trades compellingly at 9.9x past earnings and 13% under book value. Moreover, the company has excellent liquidity with a 4.3x quick ratio and $4.30 in cash per share, or just more than a third of the market cap. A recent report by National Securities has the stock at a "buy" and a target of $16--more or less in-line with Oppenheimer, Stifel Nicolaus, and RBC Capital Markets. At only around $12.63, the stock offers a healthy margin of safety.

But being inexpensive is meaningless if the underlying fundamentals are weak. Put differently, you want both an undervalued and good company. Corning recently raised its guidance due to an improved outlook on the LCD market and electronics sector in general. Management is now forecasted for a mid-single digit sequential rise in LCD glass volume. With Samsung's flexible OLED displays coming into production in the first half of next year, Corning's Willow Glass is likely to see a nice surge in sales. The change in outlook for LCDs suggests a reversal that will likely continue to drive momentum.

Analysts forecast Corning to grow EPS by 10% annually over the next 5 years. Combined with the 2.9% dividend yield, this is more than enough to justify making an active investment. Further, its return on invested capital of 12.7% means the business is generating value, more so than its competitors. Corning has no reason to be well under book value when the industry average P/B ratio stands at 3.4x.

Why You Should Also "Buy" TE Connectivity (NYSE: TEL)

TE Connectivity trades at only 13.3x past earnings. Free cash flow has continued to go up since 2011 and now stands at $1.4 billion on a TTM basis, or a yield of 9.2%. In the recent earnings call, management expressed that it was "especially pleased" about "free cash flow performance, which has been strong and consistent over" the company's first five years despite an occasionally "volatile and uncertain economic environment."

There are several more reasons to be bullish on the company. Management's investments are already paying dividends--the Deutsch buyout added $153 million to the top-line in the fiscal fourth quarter. The decision to reorganize the business into four segments--while slightly gimmicky--is symbolic of the company's intent on improving efficiency. Partially because of the improved productivity, management has even guided for around 5% adjusted EPS growth even in a "no growth" revenue environment. If there is 3% economic growth with signs of a macro recover, consumer reservations will dissipate and the slowing order rate that we saw in the fiscal 4Q will give way to EPS growth of 10%. Either way, when you factor in a 2.3% dividend yield and multiple expansion, the risk/reward is very compelling.

When you consider that other electronic instrument producers, like Amphenol (NYSE: APH), can trade at a respective 19.3x and 16.4x past and forward earnings and still be rated favorably on the Street, its easy to see the favorable risk/reward in TE Connectivity. Even if Amphenol grows EPS by 10.9% annually, it will only be worth $68.37. This will only provide you with an average annual return of 2.7% when you factor in dividend yields.

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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