Is Corning a Buffett Stock?

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Warren Buffett attracts a lot of attention. As the world's third-richest person and most celebrated investor, thousands try to glean what they can from his thinking processes and track his investments.

While we can't know for sure whether Buffett is about to buy Corning (NYS: GLW) -- he hasn't specifically mentioned anything about it to me -- we can discover whether it's the sort of stock that might interest him. Answering that question could also inform whether it's a stock that should interest us.

In his most recent 10-K, Buffett lays out the qualities he looks for in an investment. In addition to adequate size, proven management, and a reasonable valuation, he demands:

  1. Consistent earnings power.
  2. Good returns on equity with limited or no debt.
  3. Management in place.
  4. Simple, non-techno-mumbo-jumbo businesses.

Does Corning meet Buffett's standards?

1. Earnings power
Buffett is famous for betting on a sure thing. For that reason, he likes to see companies with demonstrated earnings stability.

Let's examine Corning's earnings and free cash flow history:

anImage

  Source: Capital IQ, a division of Standard & Poor's. Free cash flow is adjusted based on author's calculations.

Over at least the past five years, Corning's profits fluctuated in large part with demand for its glass. Management recently lowered this year's outlook for worldwide glass demand. It still expects 20% growth in its Gorilla Glass (a popular component of handheld devices), though other parts of its business will likely be affected.

2. Return on equity and debt
Return on equity is a great metric for measuring both management's effectiveness and the strength of a company's competitive advantage or disadvantage -- a classic Buffett consideration. When considering return on equity, it's important to make sure a company doesn't have an enormous debt burden, because that will skew your calculations and make the company look much more efficient than it actually is.

Since competitive strength is a comparison between peers, and various industries have different levels of profitability and require different levels of debt, it helps to use an industry context.

Company

Debt-to-Equity

Return on Equity (LTM)

Return on Equity
 (5-Year Average)

Corning11%17%27%
3M (NYS: MMM) 32%27%32%
TE Connectivity (NYS: TEL) 35%16%1%
Becton Dickinson (NYS: BDX) 51%24%22%

Source: Capital IQ, a division of Standard & Poor's.

Like many of its peers, Corning tends to generate high returns on equity. It employs minimal debt.

3. Management
CEO Wendell Weeks has been at the job since 2005. Prior to that, he was a president of the company (when it was just Corning Satellite Radio). Prior to that, he had served in a number of other roles at the company since 1983.

4. Business
Specialty glasses may not be the industry most susceptible to technological disruption, but it does require a fairly significant amount of technological know-how and research and development to stay ahead of the curve.

The Foolish conclusion
Regardless of whether Buffett would ever buy Corning, we've learned that, while the company operates in a somewhat technological industry, it exhibits some of the other characteristics of a quintessential Buffett investment: consistent earnings, high returns on equity with limited debt, and tenured management.

If you'd like to stay up-to-speed on the top news and analysis on Corning or any other stock, simply click here to add it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks by clicking here.

At the time this article was published Ilan Moscovitzdoesn't own shares of any company mentioned.You can follow him on Twitter@TMFDada.Motley Fool newsletter serviceshave recommended buying shares of Becton and 3M. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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