In February, I spent some time dissecting The Intelligent Investor, the seminal book on value investing. Along the way, I talked about the Graham number as a way to value stocks. The formula is pretty straightforward: Multiply earnings per share by book value per share, then multiply that by 22.5, and finally take the square root. The result, in dollars, is the Graham number.
A quick check can help determine whether a company might be worthy of a look using Graham's teachings. He said that in an ideal situation, the P/E ratio and P/B ratio multiplied together should not exceed 22.5, with a maximum P/E ratio of 15 and P/B of 1.5. At the time, there were 56 companies that met these criteria. Now, after a couple of months that have pushed prices down, as well as recent earnings releases, the list has swelled to 73 companies.
I'm going to take another look at some of these companies and will be making a CAPScall on most of them after comparing them to competitors and examining their current value in relation to their Graham numbers. Up first will be industrial manufacturer Corning (NYSE: GLW).
What do they do?
Corning primarily makes industrial-grade glass for use in electronics. For example, Corning's Gorilla Glass is used to make the screens in many tablets and smartphones. It also makes the glass used in LCD televisions, selling it to companies like AU Optronics (NYSE: AUO) and LG Display (NYSE: LPL), although both companies appear to be shifting to OLED screens this year, benefiting OLED producer Universal Display (Nasdaq: PANL).
It's not all bad news. Corning revenues during the most recent quarter exceeded expectations, and speculation abounds that Gorilla Glass will be the screen used in Apple's (Nasdaq: AAPL) iTV, if and when such a product hits shelves. Corning also stands squarely in the middle of many emerging trends, and still provides its Gorilla Glass for Apple, which sold 35 million iPhones and nearly 12 million iPads during its recent quarter. Finally, mutual fund manager Donald Yacktman, so buoyed by the prospects of the company, recently added more shares to his mutual fund that has returned 175% over the past decade.
What's it worth?
When I last looked at Corning, its Graham number was right around 23, and it remains at that point. Since most of its direct competitors continue to post quarterly losses, it is difficult to compare them directly. Only Universal Display has seen a profit the last 12 months, and it currently trades well above its current Graham number. At its current price, Corning is still 40% below its Graham number, giving it plenty of room to grow into that valuation. I will be maintaining my current "thumbs-up" over on my CAPS page and updating the call with the new values.
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