Corning Hurt by Low Earnings, Price Cutbacks

Everyone loves Gorilla Glass. While Corning (NYSE:GLW) might not be a brand that everyone recognizes, they have manufactured the glass for every Apple (NASDAQ: AAPL) iPhone for the last several years. In today's world very few people do not have some type of Apple product. With Gorilla Glass on 200 million devices worldwide, there aren't many people who aren't using a device that doesn't have glass on it made by Corning. In fact, Corning's glass has been used in more than 20% of devices worldwide.

While Corning does not have an identifiable consumer monopoly brand name product, the products that it manufactures glass for do (such as Apple). Corning is starting to face competition from a company called Asahi Glass Co. of Japan that makes a glass called Dragontrail, which is being used by Sony and Samsung. To constantly update the company's products, Corning invests about 10% of their revenue in research and development.

The company also gains strength from a light debt load, shown by their 0.21 debt to equity ratio. Looking at Corning's EPS indicates that they have been growing at a rate of 14.72% compounded annually for the period of 2005 to 2015, and at a disappointing rate of -7.87% for the last five years. Earnings are all over the place, rising and falling year to year without any sign of consistency.

Looking at the EPS chart below shows that the company's earnings are neither strong nor stable and currently are in a downward trend.

EPS
2005 - $0.38
2006 - $1.14
2007 - $1.34
2008 - $3.30
2009 - $1.27
2010 - $2.26
2011 - $1.76
2012 - $1.07
2013 - $1.33
2014 - $1.73
2015 - $1.50

Corning has five major businesses that it supports: Display Technologies, Environmental Technologies, Life Sciences, Optical Communications and Specialty Materials. The company also announced this past July that it sees its shares as undervalued and will be buying back $2 billion worth of stock through the end of 2016.

Management has also performed well in the last nine years. In 2014 the company had retained earnings of $1.59 a share. From 2005 to 2014, EPS grew by $1.35 a share, from 38 cents a share by the end of 2005 to $1.73 by the end of 2014.

Corning's return on equity is also above average. As of January, the average return on equity for a public company is 14.49%. The return on equity for Corning for the last 10 years looks like this:

Return on Equity
2005 - 12.53%
2006 - 28.41%
2007 - 26.00%
2008 - 43.24%
2009 - 14.26%
2010 - 20.54%
2011 - 13.53%
2012 - 7.64%
2013 - 9.15%
2014 - 12.52%
2015 - 11.17%

This gives you an average annual return on equity for the last 10 years of 19.89%. It's important to note that Corning is currently earning a below average return on equity and has been since 2011. This shows that Corning's management may not be as efficient now as they were from 2005 to 2010. Although Corning's glass can be found on almost every iPhone, they have had to lower their prices on display glass.

While the company's unstable earnings may make it difficult to predict their future earnings with any kind of certainty, the investor must decide whether the company is in their realm of confidence.

Currently Corning has an EPS of $1.53 a share. Divide $1.53 by the interest rate on long term treasury bonds currently, approximately 4.66%, and you get a relative value of $32.83 a share ($1.53 / .0466 = $32.83).

So far this year, you could have bought a share of Corning for as little as $15.42 a share and for as much as $25.16 a share. Since 2015 EPS is $1.53, if you paid between $15 and $25 a share, your initial rate of return would be between 6% and 9.9%.

Viewing Corning's EPS growth rate for the last 10 years indicates that it has been growing at an annual compounding rate of 14.72%. So ask yourself this: Would you rather own a treasury bond with a rate of return of 4.66%, or a share of Corning with an initial rate of return of 9.9% that might either increase 14.72% or decrease 7.87% annually?