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Corning Hits a Glass Wall
06/05/2012 4:51 pm EST
But short-term headaches shouldn’t have any impact on the stock over the long term, providing a nice opportunity to buy low for investors willing to hang on, writes MoneyShow’s Jim Jubak, also of Jubak’s Picks.
If Mr. McGuire were to whisper to Benjamin Braddock his “just one word” of advice today, instead of 1967, it would be not “plastics” but “glass.”
This is a golden age for glass:
- New larger, brighter, and more detailed displays require larger and purer glass.
- The world’s army of mobile devices requires tougher but thinner glass for screens.
- Reducing energy use in brighter LCD and OLED displays requires more uniform and flexible glass to use in a new generation of backplane substrates that allow the use of smaller and faster transistors.
And from new product announcements this week and from teasers about new products at recent company presentations, it’s clear that these high technology glass products will be followed by others.
On June 4, for example, Corning announced that had shipped samples of Willow Glass to device manufacturers that include Apple (AAPL) and Samsung. The glass is so flexible that it can be manufactured in a roll and wrapped around a device or a structure.
The company is hoping that Willow Glass will start showing up in consumer products in 2013. Further out, according to recent company presentations, are such products as an anti-microbial glass.
Corning has always been a stock that you buy as much for its tomorrows as for its products today. It is one of the world’s great research and development companies.
Sometimes, frankly, the company gets ahead of itself, building out capacity for a new product—optical fiber, for example—faster than the market can ultimately absorb it. Sometimes the market’s uptake of a new Corning technology, such as the extra tough Gorilla Glass for mobile displays, lags behind the company’s enthusiasm for a technology.
And sometimes, and this becomes a real problem during a market slump, Corning convinces itself that the superior technology of its glass will keep sales growing even as the company’s customers are seeing their end sales drop.
Those moments give you your buying opportunities in the stock—if you can wait on the sidelines as the company eventually comes around to rationalizing supply and demand. I think you’re looking at one of those now.
The big deal for Corning over the past year or so has been a global oversupply that has depressed the price of display glass. The company’s display technologies segment, which accounted for about 40% of sales in 2011, saw prices and sales slump as the global economic slowdown reduced demand for flat-screen displays, especially in the TV and PC segments.
That slump occurred even though Corning’s proprietary manufacturing processes allow it to produce larger, thinner, and higher-quality pieces of glass than competitors. That had allowed Corning and its 50%-owned subsidiary, Samsung Corning Precision, to grab more than 50% of the display glass market.
But that market share—and Corning’s high margins in this business—didn’t protect the company’s display revenues when the global economic slowdown ate into consumer purchases of TVs and PCs. Corning’s customers stopped ordering as they worked down inventories.
That slump is forecast to gradually end in the second half of 2012, which should lead to stable margins by the end of the year and some margin expansion in 2013. According to Standard & Poor’s, sales will grow by 4% in 2012 and 7% in 2013. Margins and earnings should pick up in 2013 because Corning will have completed spending on upgrades and additions to manufacturing capacity.
Wall Street projects that 2012 will mark the earnings trough for this cycle, at $1.34 a share, and that 2013’s projected 14% earnings growth will begin the recovery to the 9% or so growth earnings growth rate that the company averaged over the last five years.
The stock now trades at just 7.6 times trailing 12-month earnings, and at 9.1 times projected 2012 earnings. The company showed $6.8 billion in cash and cash equivalents on its balance sheet at the end of the March 2012 quarter and $3.1 billion in long-term debt. The shares pay a 2.45% dividend.
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