Update Corning (GLW)
10/14/2011 2:06 pm EST
I think the message from Corning’s management is extremely clear. They think that their company has a great long-term future (hence the dividend increase), that it seriously undervalued (hence the stock buyback), but that the near term is likely to be very rough (hence the negative guidance.)
Let’s take those three points one at a time, last-to-first, okay?
The near term slowdown. Corning now dominates the market for glass for LCD displays with about a 50% market share. It hasn’t achieved that dominance by cutting prices but by combining a propriety manufacturing process that makes it possible for the company to produce larger, thinner, and higher quality glass than rivals such as Nippon Electric Glass. Gross margins took a tumble in 2009, falling to 38.8% before rebounding last year to the 46% level the company hit in 2007 and 2008.
But even dominant players take a hit when demand falls big time. And that’s what has happened to Corning in 2011—consumer demand for TVs and computer monitors has fallen enough so that even growing demand for the company’s Gorilla Glass in screens for smart phones and tablets hasn’t been able to fill the gap. (In the first half Corning’s display sales fell by 4%. Revenues from Gorilla Glass go to the specialty materials unit, which accounts for about 14% of revenue.) Wall Street analysts are now looking for Corning’s earnings to fall by 18.4% year-to-year in the September quarter to be reported on October 26. For all of 2011 Wall Street projects that earnings will fall by 13.3%.
Earnings, according to Wall Street anyway, will rebound in 2012 with 9.5% growth as demand for consumer electronics strengthens.
That recovery in earnings growth doesn’t depend just on Corning’s display technologies business, however. That unit makes up about 40% of Corning’s revenue.
Another 26% of revenues come from the telecommunications unit that produces optical fiber, cable assemblies, and fiber optic components. That business showed signs of a pickup in the first half of 2011 with revenue climbing by 27%.
Another 13% of sales comes from the company’s environmental technologies unit where the increasingly sales of diesel trucks and cars is driving demand for the company’s filters and substrates from auto and truck makers that are emphasizing clear diesel technologies as a way to increase fuel efficiency.
The long-term future. The 50% increase in dividends (to 30 cents a year from 20 cents) is the board of directors’ vote of confidence in the company’s long-term prospects. I think investors should think of Corning as a technology company rather than as a glassmaker or a manufacturer of cable. In recent years the company has spent about 8% of revenue on research and development—and the result is a revenue stream hitched to fast-growing technology products such as LCD displays, mobile devices, fiber optics, and clean diesels. Over the last five years earnings growth at Corning has averaged 20% a year. Wall Street projects earnings growth of 11% a year for the next five years. I think that’s low but I’d take it because…
…this is a really undervalued stock. Wall Street projects 2012 earnings of $1.97 a share—on the October 13 close of $13.56 that works out to a forward price to earnings ratio of 6.9. That makes the stock a bargain if earnings do grow at just the 11% a year that Wall Street now estimates.
But the bargain doesn’t stop there. Book value for Corning is $13.40 a share, according to Morningstar—which means that at the October 13 close of $13.56, you’re paying just a bit above book for a price to book ratio of 1. (And we won’t even talk about the fact that Corning sat on $6.4 billion in cash at the end of the second quarter. That works out to about $4 a share in cash.)
I think the stock is cheap enough to buy here but I also see a good chance that the stock will actually get cheaper over the next three to six months. The bottom of its 52-week range is $11.51.
Your call on when to buy or add to existing positions depends on your take on the global economy and the lasting power of the current bounce. If you want to play it very conservatively, buy a partial initial position here and add on with any weakness. I think $17 a share is a reasonable 12-month target price.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did not own shares of Corning as of the end of June. For a full list of the stocks in the fund as of the end of June see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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