The feel-good sentiment of the first quarter seems to have dissipated quickly, the latest market worries don't mean an end to the recent rally.
The Fed's announcement might be a short-term negative for sentiment, but it signals greater confidence in the economic recovery and means that the Fed will have less to undo when its moves from expansion to a more neutral monetary policy. It also means less inflationary pressures down the road.
As for payrolls, a month does not a trend make. The jobs market is slowly on the mend.
Interestingly, slow earnings growth environments have actually been very good for stocks. An additional catalyst for the economy and the stock market is the bottoming of the housing market.
To those with sidelined cash that have been looking for an entry point, it's a good idea to use the current pullback to put some money to work in stock like these.
Corning (GLW) continues to dominate the global Liquid Crystal Display (LCD) glass business with a 55% market share, leading technology and the lowest cost structure. Business has slowed in the past year as global GDP growth slowed, the LCD glass business matured and retailers/wholesalers aggressively destocked LCD glass. With the LCD glass business currently shrinking supply, Corning should see a solid rebound in its earnings, though it might take more than one quarter to fully play out. Meanwhile, new technologies such as Gorilla Glass are enticing new users, and GLW should also see a pickup in its other businesses.
At the recent price of $13.48, GLW trades for less than 1x book value of $14 and 10x 2012's EPS of $1.35, compared with historically more than 2x book value and 14x times earnings. As earnings recover, we look for the stock to rebound to the low $20s.
GLW just announced an acquisition of Becton Dickinson's Discovery Labware unit. The deal makes strategic sense, as it builds their Life Sciences business. In addition, the price paid seems reasonable and the deal is expected to be modestly accretive in its first full year for GLW. Having said that, $730 million is a lot for a tuck-in acquisition and GLW's target of 5 cents per share earnings contribution in 2016 is quite modest. We at today's transaction as a modest negative to neutral, but it doesn't move the needle either way on the stock.
TE Connectivity (TEL) is the global leader in electronic connectors for autos, telecom networks, utility grids and industrial systems. Investors are concerned that the current global slowdown will impact order rates, revenues and earnings. But management has continued to affirm the outlook due to continued global auto demand, sustainable emerging markets growth, accretive M&A deals and further margin improvement opportunities. At the recent price of $34.82, TEL trades for just 11.6x 2012's EPS of $3.00. The firm's peers are currently trading at 14x to 16x times earnings. As earnings continue to grow, we expect TEL to move meaningfully higher.
Tidewater (TDW) is the largest provider of service vessels to the offshore drilling industry. Offshore petroleum drilling is expected to grow rapidly over the next five years due to high oil prices and major deepwater finds off the coasts of Africa, Brazil, Australia and the United States. This increasing demand has caused pricing in the global towing and supply fleet to reach an inflection point in the last six months and we believe it is now very early into a multi-year up cycle.
TDW will be a significant beneficiary of this improved pricing environment as they have one of the newest fleets in the industry, in which new ships typically garner premium pricing. We believe the company has earnings power of $8 to $10 per share in this recently begun industry upcycle. At the recent price of $52.78, TDW trades for under 1x 2012's projected book value of a $53.40, compared with normative 1.5x book value. Improving earnings should cause a meaningful multiple expansion and drive the price higher over the next 18 months.