Better Buy: Corning Incorporated vs. Cirrus Logic

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Corning (NYSE: GLW) and Cirrus Logic (NASDAQ: CRUS) are both well-known Apple (NASDAQ: AAPL) suppliers. Corning, which Apple holds a stake in, has manufactured the iPhone's "Gorilla Glass" screen for the past decade. Cirrus produces audio chips for Apple's devices.

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Corning has rallied more than 30% this year, but Cirrus has stayed nearly flat. Let's examine why the glass maker outperformed the chipmaker by such a wide margin, and if those trends will continue through the end of the year.

Comparing their core businesses

Corning's business is divided into six main units -- Display Technologies, Optical Communications, Environmental Technologies, Specialty Materials, Life Sciences, and "All Other". The Optical Communications unit, which provides network components for carriers, is the largest business and generated 34% of its core sales last quarter.

Corning's second largest business is its Display Technologies unit, which generated 28% of its core sales by selling glass substrates for LCD screens. The Specialty Materials business, which generated 14% of its revenue, produces over 150 formulations for glass (including Gorilla Glass), glass ceramics, and fluoride crystals. The Life Sciences business -- which produces glass and plastic lab equipment, media, and reagents -- generated 8% of Corning's sales.

Cirrus produces a wide range of analog and mixed-signal ICs, which are split into two categories -- chips for portable audio products (90% of its revenues last quarter) and chips for non-portable audio and other products (which generated the remaining 10%).

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Cirrus' largest customer is Apple, which accounted for a whopping 80% of its sales in the first six months of fiscal 2018. Samsung (NASDAQOTH: SSNLF), Cirrus' second largest customer, contributed 10% during that period. Cirrus' near-total dependence on these two customers is worrisome, since any abrupt changes (like switching to in-house chips) could torpedo its entire business.

How fast are Corning and Cirrus growing?

Corning's revenue rose 6% annually last quarter, marking its fifth straight quarter of positive annual sales growth. Specialty Materials revenue rose 26% annually on robust demand for Gorilla Glass in smartphones. An increasing number of automakers are also installing Gorilla Glass in their new vehicles.

Optical Communications revenue rose 15% on robust demand for network upgrades, and the Life Sciences business posted 4% growth. The only soft spot was Display Technologies, which posted a 15% decline (but a sequential gain) on weaker demand for LCD displays. On the bottom line, Corning's core earnings rose 2% annually. Analysts expect its core sales and earnings to respectively rise 7% and 11% this year.

Cirrus' revenue fell 1% annually last quarter, ending a four quarter streak of double-digit sales growth. Sales of chips for portable audio products dipped 0.4%, while sales of chips for non-portable audio products fell 3%. Its non-GAAP earnings rose by less than 1%.

Cirrus' growth looks anemic, but investors should note that the company's growth is seasonal and relies heavily on big smartphone launches from Apple and Samsung. Sales of their new devices should accelerate over the next few months, and analysts expect Cirrus' revenue and earnings to respectively rise 7% and 8% this year.

The valuations and dividends

Corning trades at just 14 times earnings, which is below the industry average of 18 for electronics components suppliers. Cirrus also has a trailing P/E of 14, compared to the industry average of 27 for semiconductor makers.

Both stocks look cheap, but Corning pays a dividend and Cirrus doesn't. Corning pays a forward dividend yield of 2%, which is supported by a low payout ratio of 26%. It's hiked that dividend annually for six straight years.

The winner: Corning

Cirrus is a better straight supply chain play on Apple than Corning, but Corning is the better all-around investment. It has a well-diversified business, the industry-leading Gorilla Glass which can be used across multiple industries, a low valuation, and a solid dividend. Cirrus isn't a bad investment, but I'd rather simply invest in Apple than deal with its volatile sales growth.

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Leo Sun has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Cirrus Logic and Corning. The Motley Fool has a disclosure policy.