1. Corning (NYSE: GLW), rated a BUY by Crédit Agricole
This year is shaping up to be the year of the iPad, with sales of tablet PCs almost quadrupling to 70 million units (worth more than $30bn). Apple is set to snaffle around two-thirds of the market, with the sector as a whole projected to surge around 80% per year between 2010 and 2014. So how can you cash in?
One way is via Apple itself, or via its eco-system of vendors, such as ARM, although most of these seem expensive. Samsung’s Galaxy, Dell’s Streak and Motorola’s Xoom are all good names, but none are bargains. However, one niche where a single company could make a killing is in supplying the speciality glass that goes into every touchscreen.
Corning is a developer of “Gorilla Glass”, which has been engineered at the molecular level to be ultra-thin, durable and scratch-resistant. It’s an ideal cover for finger-sensitive applications, such as smartphones, tablets, laptops, LCD monitors and the newest 3D televisions.
Thanks to its spectacular success, Corning’s speciality materials unit saw revenues rocket 165% in the first quarter of 2011 to $254m. This exponential growth is set to continue, delivering divisional sales of around $1.3bn for 2011. To date, the company has won 370 contracts to design appliances, of which 217 are currently on the shelves and another 30 models are scheduled for release in the next three months.
Corning is also the global leader in high-performance glass for the LCD displays (41% of turnover) incorporated in laptops and TVs. It makes advanced fibre optics for the telecom (25%) and drug discovery (7%) industries, along with ceramic components used in environmental applications (13%). On average, its glass markets are expected to increase by 12% per year through to 2014.
Wall Street is forecasting 2011 revenues and underlying earnings per share of $8.1bn and $2.05 respectively, rising to $9.1bn and $2.24 in 2012. The stock trades on a p/e ratio of less than ten, which seems lightweight, given that this is such a science-rich organisation. I would value Corning on a 13-times multiple, which, after adjusting for its $3.1bn cash pile, generates an intrinsic worth of about $28 per share.
In terms of possible potholes, the group is exposed to ongoing price deflation, technological obsolescence and fierce competition from Asian firms, such as Asahi. For British investors, there are the usual foreign-currency considerations, as America accounts for 30% of sales. Lastly, the board has warned that second-quarter results will be affected by a one-off inventory correction at Sharp.
That said, with its cheap rating, excellent prospects, solid balance sheet and leading position in a ballooning sector, Corning is a strong performer. Crédit Agricole has a target price of $30 per share.
Recommendation: BUY at $18.60
2. Computer Sciences Corp (NYSE: CSC), rated a BUY by Jefferies
Twelve months ago, shares in BP reached multi-decade lows as investors reacted to news that President Barrack Obama would keep his “boot on the throat” of this oil giant. Yet once the public tongue-lashing eased, the stock picked up and has since galloped up a feisty 45%.
In a similar scenario, American group CSC has felt the heat from remarks made by Britain’s prime minister. The British government is blaming the IT outsourcer for delays and cost over-runs on the NHS’s flagship £11.4bn rollout of e-patient records. David Cameron warned that “all options” (including cancellation) were on the table in relation to CSC’s £3bn contract to install health systems across the north, Midlands and east of England.
CSC took over from Accenture in 2006 after the group incurred massive losses. This political rebuke, together with knock-on fears that CSC may be locked out of future government work, is the main reason the shares have bombed 30% since February.
But there appears to be light at the end of the tunnel. I’m sure this painful affair isn’t solely CSC’s fault, especially as it is a big player in e-health in North America. The firm recently completed the national rollout of a computer platform for Britain’s 136 prisons, which will provide doctors with access to a single e-record for each offender. So it’s shown that it can deliver. CSC’s bread-and-butter services (IT consulting, integration, outsourcing, software and web hosting) allow its clients to expand their capabilities, increase productivity and reduce costs. All these factors will appeal to customers in the current austere climate.
What has really caught my eye is that the group is making great strides into the exciting areas of cloud computing and cyber-security. A fortnight ago it bagged a framework deal to enable the American government (37% of sales) to deploy a range of cyber and actual security services. This contract comes hot on the heels of a five-year $110m order from the US Navy to provide IT support for the design, construction and testing of its Zumwalt Class Destroyer ships.
Looking ahead, the board is predicting turnover of between $16.5bn and $17.0bn, underlying earnings per share of $4.70 to $4.80, and $4.30 per share of free cash flow for the year ending March 2012. That puts the stock on a frugal price/earnings (p/e) ratio of 7.9 with a free cash flow return of more than 10%.
However, I would rate Computer Sciences Corp on an eight-times earnings before interest, tax and amortisation (EBITA) multiple, or about $12bn. After adjusting for net debt of $742m and lopping off another $1bn in possible fines and compensation, this generates a fair value of more than $60 per share.
In the short term, the outlook will remain sticky, especially if the dispute with the NHS can’t be resolved. Competition from the likes of Accenture, HP and the Indian and European outsourcers is also intense. There’s also an ongoing accounting investigation into the group’s Nordic arm to keep an eye on. But the bottom line is that once these temporary problems have been resolved, the stock should re-rate in line with its more highly-valued peers. And with such strong cash flow, CSC could become a take-over target. Jefferies has a price target of $53 per share.
Recommendation: BY at $37.70
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments. See
www.moneyweek.com/PGI
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