Why You Should Buy Corning & This Stock

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 bullish on the telecom and tech sector in general, it makes sense to buy their suppliers--not just the semiconductors, but also glass manufacturers. It has been a volatile market with supply-chain problems and decelerating trends. In this article, I highlight several stocks that you should consider looking at with the prospects of a recovery.

Why You Should Buy Corning (NYSE: GLW)

The leading glass manufacturer has been through challenging markets, but the stock's cheapness has received increasing recognition. In late October, National Securities reiterated its "buy" rating and gave the stock a $16 price target, which is 27% above the prevailing price and in-line with Oppenheimer's estimate made in late August. At 15% under book value and a fortress balance sheet complemented by a 4.8x current ratio, much of the downside has been factored in.

Moreover, much of the downside is dissipating. Earlier this year, management was looking at margin pressure and flat LCD glass capacity. Now that Gorilla Glass and improving LCD glass volumes are expected to offset weakness in Corning's other businesses and keep margins flat against the previous quarter, more attention can be focused on the upside story. Willow Glass for flexible displays in bendable gadgets are just another positive catalyst that echo the success of Gorilla Glass. The latter technology is now featured on over 1 billion devices globally and may hit $1 billion in revenue this year. Pricing declines are expected to moderate next quarter, but Specialty Material is expected to rise 5% sequentially off of Gorilla Glass momentum (growth of 60%).

Management recently boosted guidance ahead of a conference call. Demand for LCDS have been better-than-expected and are now guided for mid-single digit sequential growth. The company has been working on reducing costs amidst an uncertain economy, so investors may actually find a positive surprise in margins when pricing power jointly improves.

TE Connectivity (NYSE: TEL) Vs. Amphenol (NYSE: APH)

TE Connectivity has shown more pressing issues. In the most recent quarter, China recorded the slowest pace since the 2008-2009 business period, and Europe, which represents around one-third of the top-line, fell 5% organically. Management expects continued seasonal declines in Europe. The European automotive production market is forecasted to decline 10% next quarter. Domestic telecom markets have been soft and eroded 6% y-o-y in F4Q.

Free cash flow trends have been consistent despite an uncertain macro environment. For vehicle production, Chinese and North American markets will offset weakness in EMEA and Japan. Shares are near a 52-week high after rising 30.4% from the lows, but analysts are bullish on the company all the same. All but one of 9 reporting analysts say the stock is a "buy" or better--the other, saying a "hold". Return on invested capital stands at 11.3%, which is ~150 bps above the competition.

The stock trades at a respective 13.8x and 10.5x past and forward earnings versus 20.2x and 17.2x for Amphenol, a competitor. Amphenol is forecasted for 10.9% annual EPS growth over the next 5 years. Assuming expectations are met, 2016 EPS will come out to $5.16. At a multiple of 16x, this translates to a future stock value of $82.56. Discounting backwards by 10% yields a present value of $51.26, which is around a 20%+ discount to the prevailing price. Multiples may expand at TE Connectivity with exiting Amphenol investors who will grow fearful of overvaluation.

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!

blog comments powered by Disqus