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40% Upside From This 'Sleeper' Tech Giant

Wednesday, January 15, 2014 - 8:30am

It boggles my mind to think about how many billions of casseroles have been made by American moms and eaten by eye-rolling American kids over the past century.

That's a weird thing to obsess about, I know -- but it's not really the casseroles I'm thinking about. It's the casserole dishes and, most likely, many of those glass dishes were manufactured by Corning (NYSE: GLW).

Throughout its long history -- it was founded in 1851 -- Corning has made glass for lots of different things. But during the tech boom of the late 20th century, this old-line American industrial company reinvented itself as a cutting-edge technology company making fiber-optic cable for the information superhighway.

Then the bottom fell out:

GLW was pretty much hung out to dry by the market as investors realized that, in typical American fashion, telecom providers had gotten ahead of themselves and overbuilt their fiber-optic networks. "There's no way Corning will ever make money again," said the skeptics.

Then Corning reinvented itself again, thanks to smartphones and tablets -- with a product they had developed called Gorilla Glass, which turned out to be perfect for these devices.

I last profiled Corning in February 2012, and the stock has climbed more than 40% since then. The company has all of the qualities that fit my American Renaissance theme for 2014.

Even more exciting, it has all of the same characteristics my colleague Nathan Slaughter is using to form the basis for some very special research. I won't reveal all the details just yet, but here's the gist...

If you're a regular StreetAuthority reader, you know we like companies with rising dividends, diminishing levels of debt and generous stock buyback programs. Nathan's research uses these three metrics to find the absolute best performing stocks over the long-term. And Corning fits the bill.

But before I get into that, let me explain more about Corning's transformation and why my thesis concerning the stock hasn't changed and why it can continue to rise.

From Casseroles To Computers
Corning has done an amazing job of transforming itself since the end of the 20th century. Today, 33% of the company's revenue comes from display technology (flat-panel TVs, computer monitors, smartphones, tablets), 31% from telecom (fiber optic cables), 15% from environmental technology and 10% from life sciences products.

Flickr/Doug Kline
Since the rollout of Gorilla Glass in 2007 to satisfy Apple's demand for iPhone screens, Corning has tweaked and improved the product, expanding its applications and markets.

The product designed for display technology use, Gorilla Glass, is clearly the flagship product. Since its official rollout in 2007 (Gorilla Glass was originally an experimental project shelved in 1971) to satisfy Apple's (Nasdaq: AAPL) seemingly insatiable demand for iPhone screens, Corning has tweaked and improved the product, expanding its applications and markets.

At this month's International Consumer Electronics Show in Las Vegas, the company debuted the most advanced incarnation of Gorilla Glass yet: a thinner (0.4 millimeters) anti-reflective, anti-microbial product to be used not just for computing devices but in appliances, automotive and health care applications.

Strength In Numbers
But great products are nothing without great financial management -- and Corning's balance sheet is as strong as Gorilla Glass.

The company had $2 billion in free cash flow for 2013. Analysts expect that number to increase 35% this year, to $2.7 billion. Earnings per share (EPS) are expected to come in at $1.22 for year-end 2013 and to increase modestly to $1.24 for 2014. However, EPS is forecast to grow at better than 10% in 2015, to $1.38 a share.

However, Corning's most impressive numbers by far lie in its huge pile of cash and its lack of long-term debt. With a market cap of close to $26.5 billion, the company carries only about $3.3 billion worth of long-term debt, giving it a healthy long-term debt-to-market cap ratio of just 13.5%. That helped earn the company a recent credit rating upgrade to A- from BBB+.

Even better, the company has $5.9 billion of cash and short-term investments on the balance sheet. As a result of this stack of cash and low debt, Corning has been able to increase its dividend at a rate of 10% annually over the past five years and initiate a $2 billion stock buyback -- just what shareholders like to see.

Risks to Consider: The biggest risk facing Corning is price pressure and weak demand within the TV and display segment. Prices continue to drop on flat-panel TVs and the traditional PC market, shrinking manufacturing margins. Corning seems to have gotten ahead of this puck by focusing on its touch-screen business. The strong balance sheet will also provide a good buffer.

Action to take --> Corning shares currently trade around $18 with a forward price-to-earnings (P/E) ratio of 14.8, which is very inexpensive for a company with this much cash, a growing dividend and little debt. Based on these strengths, a reasonable 12-month price target of $25 makes sense. Factoring in the 2.2% dividend yield, that would be a total return of over 40%.

P.S. I mentioned earlier that Nathan is working on a special research project that you'll want to see. In short, Nathan's report shows how investors can use a strategy we call "Total Yield" to capture the highest returns with the least amount of risk by combining the three ways companies return value to shareholders: dividends, buybacks and debt reduction. To reserve a free copy of this report, which shows you how to calculate "Total Yield" -- and to get the names and ticker symbols of some of the highest "Total Yield" stocks on the market -- simply follow this link.

Adam Fischbaum does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.

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