What’s Lombardi’s “5G Stock Too Cheap to Ignore?”

Looking into the idea teased as "5G Silicon Valley" by George Leong

By Travis Johnson, Stock Gumshoe, March 17, 2021

I’ve gotten a few questions about this pitch from George Leong for Lombardi’s Special Situations (currently $195/yr) in the past several days, so I’m going to dig into it and see what they’re pitching — but I should warn you, when I looked back through the ol’ cluttered inbox I did find that this ad has been running since October, probably without much change.

Still, I haven’t written about this ad before, and if the questions rolling my way are any indication it’s apparently catching some eyeballs this week so let’s give it a look… it still carries that bold assertion that this is the “Number one 5G stock to own right now,” so what’s that stock that Leong is calling “5G Silicon Valley”?

Here are our clues…

“A longtime partner of Apple and a company whose products have played pivotal roles in many of America’s technological advancements, this company makes a product that is referred to as the lifeline of 5G connectivity…

“…a product so tiny its diameter is as big as the tip of a ballpoint pen…

“…yet it has the capacity to make data travel at the speed of light…

“This tiny product is to 5G what microchips are to computers!”

And a few other hints are dropped along the way as well…

“… despite being a tech company, over the past 10 years, the company has increased its dividend payout by 340%…it paid out over $740 million to its shareholders last year alone!”

There’s a bit more, but I’ll take you out of your misery and won’t walk through too much of the pitch right now… the Thinkolator is tapping me on the shoulder right now with that answer for us, so we can confirm that this must be Corning (GLW), the glass and ceramics pioneer from central NY that has been behind some huge innovations for decades, including the Gorilla Glass that made the iPhone screen so much sturdier, and, yes, fiber-optic cables that can send signals around the world at the speed of light.

And it’s those fiber cables, of course, that are the “backbone of 5G” being talked up here by Leong — the 5G signal goes quickly from your phone to the 5G antenna and back to give you that fast and low-lag connection, but then that antenna needs to connect to the internet’s big trunk lines and to data centers to actually connect you to something meaningful, and that’s where fiber optics come in, providing the fast connections from data center to data center, but also providing the “backhaul” connection that feeds those 5G towers and small cells. There are other backhaul solutions, the signals can be bounced along via microwaves or copper cables or satellite connections, and sometimes all of those are used in more remote areas, but nothing is as fast and reliable as fiber-optic cable.

That doesn’t mean fiber is always a high-profit enterprise — huge fiber-optic networks were built in the late 1990s, when money was blowing through the system because of the dot com bubble enthusiasm, and they ended up getting wildly overbuilt, creating a big drop in demand for Corning’s fiber for years after that (and thousands of miles of buried “dark fiber” that weren’t being used), but with the continuing technology infrastructure buildout, including faster data centers that use fiber optics internally, I imagine the demand will probably remain pretty high for at least a while.

As I said, though, this ad has been rolling since October — which helps the tease to match perfectly, Corning did pay out about $740 million in dividends in 2019, rising to $787 million last year.

They also have had a few pretty flat years on the top line, thanks to weaker TV and smartphone demand pre-5G and then Chinese trade disputes and a slowdown in all the supply chains last year with the pandemic, but revenue did bounce back pretty nicely in the last quarter of 2020, and analysts expect revenue to grow by 15-20% in 2021 and earnings per share to grow by about 40%. It will very likely slow a little after that, with revenue forecasted to grow about 5% and earnings about 10% a year after that, though analysts always have a little bit of a hard time forecasting Corning’s future going out more than a few quarters — mostly because there isn’t always a lot of clarity about the future demand for their two biggest product lines, glass for large televisions, and fiber optic cable, and the large screen TV display business, in particular, has had some wild swings up and down in the past decade thanks to both inconsistent demand and big waves of new competing glassmaking capacity in Asia.

I like Corning, I’ve owned it in the past, and it has been one of the most consistently innovative American companies for generations. The revenue and earnings have not been as consistent as some of their larger near-peers in industrial innovation, firms like 3M (MMM, which I currently own), mostly because of a fairly concentrated lineup of businesses, but they have kept chugging along — and the stock, while the stock at $41 is up a bit from the mid-$30s where it was when this ad first started hitting my inbox, and from the $28 it was at in 2019 when I put it on my watchlist, it’s not irrationally expensive.

If there’s more stimulus going into communications infrastructure, or pushing consumers to buy a lot more TVs or new phones (or cars), then Corning could certainly benefit from the economic recovery in 2021 and do even a bit better than the $1.96 in earnings that is currently expected — so while a forward PE of 21 or so is not dirt-cheap for an industrial company that has had pretty flat revenues for a couple years, it is reasonably appealing for a company that looks like it’s still on a pretty good growth trajectory, with not a lot of risk that this is their “peak” earnings year. You can see how they see things currently in their fourth quarter earnings presentation from late January.

Here’s a note from Briefing.com that summarizes one positive analyst note in January (the stock was around $36 at the time):

“Oppenheimer upgrades GLW to Outperform from Perform and sets target price at $45. Analyst Martin Yang noted, ‘We upgrade GLW from Perform to Outperform with a $45 price target based on a strengthening business outlook and compelling valuation. We believe GLW is uniquely positioned to benefit significantly across all of its business segments as the world gradually recovers from the pandemic. The company’s streamlining and optimization efforts in 2020 have prepared it for accelerating earnings growth and FCF generation in the mid-term, as its top line resumes more sustainable growth. Meanwhile, we find current valuation compelling—GLW trades at its five-year median FY2 P/E of 16x. We believe recent stock market decline and GLW’s improving growth outlook create an attractive opportunity to own the stock longer term.'”

And Barron’s ran a very positive piece on Corning about a month ago (Investors Haven’t Figured Out This Company Is Growing Like a Chip Stock—Yet), highlighting some of Corning’s growth engines (automotive, both ceramic filters and control/display glass for new cockpits; Gorilla Glass and the newer Ceramic Shield used in new iPhones, higher-end glass used in new TVs, and even the vials used for the vaccine rollout), that piece calls out the fact that Corning should post $1.5 billion in free cash flow in 2021, which means the shares are valued at about 20X free cash flow, so it’s not just accounting earnings and buybacks that provide some support to the share price.

It’s not absolutely cheap, I suppose, but it’s certainly relatively cheap. If they can compound earnings at 10-15% a year, paying 20X earnings is very reasonable — it probably won’t double in six months and make you feel all warm inside, but it’s a strong and innovative company with a perfectly reasonable valuation, and it pays a nice dividend of about 2.3%. I can see waiting a bit for the price to come in on a bad day, and I haven’t owned this one recently, despite watching it for years, but I wouldn’t try to talk you out of buying the shares here.

That’s just what I think, though, and it’s not my money you’re worried about, it’s yours… so how do you feel about Corning today? Think a little “growth at a reasonable price” industrial technology company fits in your portfolio? Not sexy enough? Maybe too pricey for the value conscious? Let us know with a comment below.


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