Why You Should Buy These 2 Tech Suppliers
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If you are interested in betting on the tech sector as a whole, go after the suppliers. These companies indirectly meet end consumers of diverse industries, so they are likely to attract tech trends overall. Therefore, it makes sense to buy the beaten down stocks that can "ride the tide" of an accelerating tech market. Below, I review one stock that has struggled to gain back value, Corning, and another competitor.
Why Corning (NYSE: GLW) Is a "Buy"
When everyone thought that the country's leading manufacturer of glass and ceramics was dead in the water, Corning managed to pull a rabbit out of the hat: It increased revenue guidance before their conference call. And LCD--once a source of investor anxiety--has seen sales spike in recent years, as evidenced by the return of 4-6% sequential growth. The prices of LCDs were slowly falling, but this really started to moderate through 4Q12. And we can't forget that Gorilla Glass, Corning’s alkali-aluminosilicate sheet trademark, is now present in more than 1 billion products and is nearing the $1 billion revenue mark. Gorilla Glass is a thin, damage-resistant glass that is commonly applied to tablets, HDTVs, and smartphones. The rumor is that it first started to be mass produced with the first iPhone released in 2007.
While Corning’s other products and business are slowing down in sales, Gorilla Glass and LCD glass products are offsetting. A 5% sequential growth is expected for speciality materials. Fortunately, the company has another catalyst in Willow Glass, a flexible 100-micron thick piece of glass that can be used in OLEDs and LCDs. The benefit of being flexible is that shape is no longer a limiting factor in design. That's right, this breakthrough could result in even spherical-shaped technology if anyone wanted it. Samsung’s recent announcement of their OLED display, a flexible display, had no update on when it would be released, so Corning’s Willow Glass could end up being the selected material. Creating an early-mover advantage in technology supplies is critical, as evidenced by Corning's first successes.
With that said, there are risks. The company’s profits margins are getting unstable, and they ruled out a decision to leave LCD material production constant. They are now turning to macro factors. As it seems they are getting weaker, in order to stay in the market race, they are now considering lowering their product prices to stay in place.
TE Connectivity (NYSE: TEL): Challenges & Strengths
This firm is known for supplying touch screen technology, and it has a particularly strong catalyst from Microsoft's (NASDAQ: MSFT) new focus. While Windows 8 sales have been relatively weak, the company's innovation is not to be quickly dismissed. Microsoft has been producing Windows 8 desktop PCs with touch screen technology. Just like 3D films caught on after years of public disinterest, I believe the same will be true for touchscreen PCs. Ultimately, other tech firms are likely to piggy back off of Microsoft and make this technology a standard household item. Yet, over the last 12 months, since touchscreen PC production started to accelerate, TE connectivity underperformed the market by 290 basis points.
Financial performance has also held up quite well. Management recently reported unchanged free cash flow despite the bad macro environment. One of their best and highest consumers, China, has for the first time since FY2008 delivered a slow flow of profits. It is true, however, that Europe, which provides one-third of profits, reported a 5% fall in the fourth quarter of 2012. Although it’s not much, Europe continues its downfall and has investors glued on the downside. The first quarter of 2013 is expected to experience a 10% drop from the automotive industry. But despite this, TE Connectivity is seeing most automotive revenues from America and China offsetting the losses seen in Japan and the Europe, Middle East and Africa regions.
Their Elo TouchSystems, which designs touch products for industrial, automotive, medical, retail and similar industries, has seen a lot of success since its release. Its product depth has expanded into new screen sizes; one of which, the C-series, has a 16:9 aspect HD ratio. In April, TE Connectivity's sale of a touch-screen business for $400 million made me concerned that the core business was fundamentally eroding, so this kind of momentum is critical for keeping investors on board through a challenging economy. Right now, the stock is fairly cheap at 11x forward earnings and a forecasted growth rate of 10.1%. The Street is bullish on the stock with a rating of 1.9 out of 5, where 1 is a "buy."
TakeoverAnalyst has no position in any stocks mentioned. The Motley Fool recommends Corning. The Motley Fool owns shares of Corning and Microsoft. 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. This article was written by the staff of TakeoverAnalyst, which does not intend on opening a position in the next 48 hours.