After nearly a 14% fall year-to-date, we believe Corning stock (NYSE: GLW) is undervalued at the current levels. GLW stock declined from $37 in early January to $32 now. The YTD -14% return for GLW compares with -22% returns for the broader S&P500 index, which has seen lower levels due to rising inflation, higher interest rates, and their potential impact on economic growth.
Looking at the longer term, GLW stock is up only 6% from levels seen in late 2018. This marks a significant underperformance compared to some of its peers and the broader markets, with Thermo Fisher Scientific stock rising 128%, Ciena stock up 30%, and the S&P 500 index rising 50% over the same period.
The 6% rise over the last three years was driven by a 16% growth in the company’s adjusted EPS, which rose to $2.07 in 2021, compared to $1.78 in 2018. This was partly offset by an 8% decline in the company’s P/E ratio, which is 15.5x currently, compared to 17.0x in 2018. Earnings growth was driven by a 25% revenue growth, partly offset by a 190 bps decline in net income margin.
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Corning’s revenue rose 25% to $14.1 billion in 2021, compared to $11.3 billion in 2018. The revenue growth was led by higher demand for gasoline particulate filters, given the increased adoption of the emission regulations in Europe and China. However, more recently, automotive sales have been trending lower due to the semiconductor chip shortage issue weighing on overall automotive production. Corning has seen steady growth in its glass-related businesses due to a robust pricing environment. The 5G and cloud computing expansion has also buoyed the company’s overall sales, a trend expected to continue going forward.
Corning’s net income margin of 12.9% in 2021 reflects a 190 bps decline from 14.8% in 2018 due to rising costs and pricing pressure. We expect the net income margin to improve to 13.2% in 2022 as the company passes on the increased costs to the customers. Corning spent $3.5 billion in share repurchases between 2018 and 2021, resulting in the share count falling to 864 million from 941 million, and this trend is expected to continue over the coming years.
We estimate Corning’s valuation to be $45 per share, reflecting a large 40% upside from its current market price of $32, implying that investors may be better off using the recent dip to enter GLW stock for solid gains in the long run. Our valuation represents a forward P/E ratio of 19x based on our earnings forecast of $2.36 on a per share and adjusted basis for full-year 2022. This compares with an average of 20x seen over the last three years. That said, investors should take into account the near-term risks. GLW stock faces headwinds from the current weakness in broader markets. The S&P500 has now entered a bear market territory with rising concerns of slowing economic growth given the high inflation, Fed uncertainty, and supply chain disruptions.
Furthermore, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Corning vs. Amerco.
|S&P 500 Return||0%||-22%||84%|
|Trefis Multi-Strategy Portfolio||-9%||-27%||188%|
 Month-to-date and year-to-date as of 6/15/2022
 Cumulative total returns since the end of 2016