At least at some level, investing can be a lot like a spy novel. A narrative might appear one way at first only to change as new details emerge; things are rarely exactly as they first seem.
This idea certainly holds true in comparing tech companies Apple (NASDAQ:AAPL) and Corning (NYSE:GLW). Trading at roughly half of Apple's valuation, the superficial numbers would suggest that Corning is clearly the better buy. However, for the three reasons you will see below, the numbers alone fail to tell the entire story. Here's why Apple is a better value stock to buy today than Corning.
1. Corning isn't as cheap as it looks
The sheer cheapness of its stock jumps out immediately when looking at Corning. At a time when the S&P 500 trades at roughly 26 times earnings -- admittedly well above its own historic norms -- Corning stock currently trades hands at a minuscule 8.5 times earnings. However, this also contains an important investing lesson: Stocks tend to trade at such seemingly preposterous discounts for a reason.
Case in point: Corning booked a $2.6 billion gain on the revaluation of one of its equity investments during its fiscal 2016, which inflated its pre-tax income by roughly 190% on the year. With its earnings per share (EPS) expect to grow at 8% this year, Corning's 15.3 forward P/E ratio serves as a far better indicator of the company's actual valuation than its current P/E. Again, the alarm bells should go off any time you see the shares of a healthy company like Corning trading at so seemingly cheap a valuation. Corning isn't nearly as cheap as it appears at first glance.
2. Apple is cheaper than it looks
Just as Corning isn't as cheap as it looks, the value of Apple's core operating business is actually far lower than its P/E suggests. The underlying reason is fairly well documented at this point; Apple's net cash surplus totaled $158.6 billion in its most recent quarterly filing. Subtracting this staggering figure from Apple's market capitalization reduces its valuation to $570.6 billion.
Using this net-cash-adjusted market cap as the numerator to Apple's P/E ratio provides an updated valuation for the Mac maker of just 12.6 times earnings, which is significantly lower than Corning's valuation metric after removing the effect of the one-time accounting gains it recorded this year. Seen this way, Apple actually offers investors better value, though this line of reasoning does little to factor in either company's growth outlook. However, the investment thesis turns even more in Apple's favor upon adding in the companies' long-term return profiles.
3. Apple's growth outlook beats Corning's
Not to belabor the point, but comparing Apple's forward growth rates against those of Corning supports the same conclusion. Looking to the top line, consensus Wall Street estimates call for Apple to increase its sales by 5.9% this year and 7.5% next year. Meanwhile, Corning is expected to see its sales rise 3.4% in 2016 and 1.2% in 2017. The same relationship -- Apple slightly outgrowing Corning -- also applies to sell-side estimates for the two companies' earnings per share.
Much of this is likely attributable to Apple's expected debut of a fully redesigned 10th anniversary iPhone this fall. Corning, of course, will benefit from Apple's latest iPhone as a component supplier for the handset. However, Apple will certainly benefit far more from the highly anticipated device.
Beyond sales and earnings growth, Apple's gigantic -- and growing -- cash surplus gives the company far more flexibility to enhance overall shareholder returns through increased dividends and buybacks. The company can also invest heavily in future growth initiatives like electric cars or digital streaming content without affecting its current earnings outlook. At the end of the day, although Corning is no slouch in its own right, Apple is clearly the better value stock between the two companies.