Has Corning Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, and then decide if Corning (NYSE: GLW  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Corning.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

Five-year annual revenue growth > 15%

7.7%

Fail

 

One-year revenue growth > 12%

6.8%

Fail

Margins

Gross margin > 35%

43.8%

Pass

 

Net margin > 15%

28.6%

Pass

Balance sheet

Debt to equity < 50%

15.2%

Pass

 

Current ratio > 1.3

4.96

Pass

Opportunities

Return on equity > 15%

10.4%

Fail

Valuation

Normalized P/E < 20

11.92

Pass

Dividends

Current yield > 2%

2.3%

Pass

 

Five-year dividend growth > 10%

8.4%

Fail

       
 

Total Score

 

6 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Corning last year, the company has lost a point. The company's dividend yield rose, but flagging returns on equity and revenue growth caused the score drop, and the stock has managed to eke out less than a 10% gain in the past year.

These days, most consumers know Corning for its Gorilla Glass, which helps protect smartphones and other mobile devices from scratching. But the company's biggest division is still in larger displays like LCD televisions, where the industry has really struggled to remain profitable. With big supply gluts in the TV market and competition from Universal Display (Nasdaq: PANL  ) and its organic LED technology, Corning will continue to see pressure as long as it gets such a big percentage of its overall revenue from the segment.

But many investors ignore Corning's lucrative joint ventures with Samsung and Dow Chemical (NYSE: DOW  ) . Neither may represent a huge growth opportunity, but as Fool analyst Austin Smith pointed out, Corning carries its interests in the ventures at a huge discount to their net income production potential. Over the long run, those businesses give Corning stability in the light of changing conditions in smartphone technology.

Corning isn't standing still, either. Earlier this year, Corning bought the Discovery Labware business from Becton Dickinson (NYSE: BDX  ) , helping to enhance its Life Sciences division.

For Corning to improve, it needs to keep courting the huge sales that Apple (Nasdaq: AAPL  ) has generated from its iPhone and iPad lines while also reaching out in other directions. If it can succeed in doing so, then Corning offers a good value at current prices.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfection than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate the best investments from the rest.

This article has only scratched the surface of what Corning has to offer investors. Get the complete picture by picking up the Fool's new premium report on Corning. You'll learn all the pros and cons to determine whether Corning could be a perfect stock for your portfolio. Click here and get your copy today.

Click here to add Corning to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Apple, Universal Display, and Corning. Motley Fool newsletter services have recommended buying shares of Becton, Corning, Universal Display, and Apple, as well as creating a bull call spread position in Apple. 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 Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 02, 2012, at 9:44 AM, drbldr wrote:

    When you consider the risk/reward on Corning, it really is in a great position right now. They've just been through a down cycle caused by the recession and come through it earning a profit all the way. Corning is pretty accurate in predicting revenues, gross margins, etc. in their guidance. When things look worse, they've told us. They're now telling us things are improving moderately (glass volume is up, but pricing is still feeling pressure). If this company is at or past the bottom of the curve caused by the recession, it's a good time to buy. You won't double your money in the next week, but when you consider the company's balance sheet and outlook, it's not likely you will lose. It's very easy to see this as a $16-17 stock in the next 12 months. 20-30% upside with little/no downside is a pretty good opportunity.

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