This Large Cap Manufacturer Is a Steal Below Liquidation Value

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It is not often that you come across a large cap stock trading below liquidation value, but that is exactly the case with Corning (NYSE: GLW). The company sells right at, or slightly below, tangible book value, which is a rough approximation of what shareholders would receive if the company decided to close its doors and sell its assets today.

Although Corning is unlikely to liquidate in the near future, the fact that the stock trades for less than it is worth in liquidation presents investors with an interesting opportunity: investors simply need to judge whether the company is worth more dead (i.e., liquidated) or alive. If it is worth more as a going concern, then investors have a bargain on their hands.

Mr. Market is getting this one wrong

Corning is a low-cost producer of durable glass for smartphones, tablets, and televisions. It is benefiting from the worldwide growth of smartphones, tablets, and touchscreen technology.

However, Corning's stock price has fallen substantially since it traded for over $21 per share in May of 2011, and now trades for less than $15 per share. Intense competition is currently putting pressure on margins, but the stock is oversold for a number of reasons.

For one, Corning has ample manufacturing capacity that will allow capital expenditures to fall dramatically even as the company expands its business. This will lead to even greater free cash flow production, which the company has historically used to repurchase a significant amount of stock. Since the company trades below liquidation value, share repurchases will undoubtedly benefit current shareholders.

In addition to higher free cash flow on the horizon, the company maintains a fortress balance sheet. It has positive net cash and investments, which means there is room to lever up the company and produce greater returns on equity.

Not the only manufacturer in a downturn

Corning is not the only manufacturer whose margins have been under pressure as of late -- and it is a much better deal for new investors.

For instance, TE Connectivity (NYSE: TEL) is the world's largest connector manufacturer and has a significant share in each of the markets in which it competes. Like Corning, TE Connectivity produces ample free cash flow -- even during cyclical downturns. However, the company has had to undergo a restructuring due to sagging margins and a bloated cost structure.

On the other hand, Becton Dickinson (NYSE: BDX) manufactures flow cytometry and cell-imaging systems, among other products in the medical field. The company's strong brand and economies of scale allowed it to earn outsized profits for many years.

However, with input costs rising and demand falling across a number of Becton's product categories, the company may be looking at a slow year in 2013. In addition, competition is heating up in a number of Becton's business lines, which will put even more pressure on margins.

Bottom line

Manufacturing is not usually a great business; even the best manufacturers go through periods of compressed margins and uncertain outlooks. But, while TE Connectivity and Becton Dickinson trade well above liquidation value, Corning trades at a discount to liquidation value.

In order to determine whether Corning is a good investment, investors must simply decide whether the company is worth more dead or alive; if it is worth more as a going concern, then buying it at less than its "dead" (i.e., liquidation) value is a great deal.

With the explosive growth of smartphones worldwide, many investors thought they would ride Corning's dominant cover glass to massive investment returns. That hasn't played out yet, as mobile growth has failed to offset declines in the company's core business. In this brand new premium research report on Corning, our analyst walks through the business, as well as the key opportunities and risks facing it today. Click here to claim your copy.

Ted Cooper has no position in any stocks mentioned. The Motley Fool recommends Becton Dickinson and Corning. The Motley Fool owns shares of 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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