Take a SWOT at This Glass Manufacturer

By Damon Churchwell - November 29, 2012 | Tickers: MMM, GLW | 0 Comments

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A SWOT analysis, incorporating the strengths, weaknesses, opportunities, and threats attributable to a company is one way to evaluate if a company’s stock is fairly valued. Within this framework, the first two characteristics are internal, while the second two are external. Once this procedure is performed, it is possible to appraise the implications of each factor. Henceforth is a SWOT of Corning (NYSE: GLW), a company whose shares have been beaten down, but also recently provided a favorable sales outlook.

Strengths

1. Leading producer of display glass: Corning’s liquid-crystal-display (LCD) glass, utilized in notebook and flat-panel desktop computers, as well as television sets, is its largest business. As it is one of few suppliers, the segment boasts wide profit margins. Moreover, the 50% ownership of Samsung Corning Precision (SCP) substantially lifts its earnings. SCP primarily caters to manufacturers located in Korea. Demand for LCD glass worldwide has been increasing each year, and GLW management expects industry square footage to climb about 10% in 2012. Plus, although glass sales have somewhat flattened in the U.S., Asian markets, including Japan are picking up the slack.

2. Innovator of small-factor-form “Gorilla” glass: Corning’s fastest growing segment currently is Specialty Materials, the primary reason being higher sales of that protective cover glass for tablets, notebooks, mobile phones, etc. Early in 2012, the company launched Gorilla Glass 2, and it is expanding production capacity for its production.

Weaknesses

1. A Stagnant Telecommunications Unit: Corning’s telecom operation, while contributing about a quarter of total sales, is a drag on margins and appears unlikely to return to a solid growth trajectory in the near term. The performance in Telecom is largely tied to the timing of build-out projects by service providers for fiber-to-the-premises. But, the profitability is well below company averages, as it experiences industry consolidation, pricing pressure, and competition for new products. Specifically, in the optical fiber and cable market, it competes predominantly with Japanese firms.

For hardware and equipment, one competitor is 3M Company (NYSE: MMM). The diversified manufacturing giant's Flexible Circuits unit makes products for the fiber-optic and copper-based telecommunications markets. Sales in its Electro and Communications Business, overall, are down from last year, and represent around 11% of its total sales. Another is Switzerland-based TE Connectivity.

2. Dow Corning under pressure: This is GLW’s other major equity investment. Known for its silicone offerings, Dow Corning also products polycrystalline products. Unfortunately, of late, sales of that substance into the solar panel sector have been hampered by pricing weakness stemming from cuts in government subsidies and overall declines in domestic solar production. Whereas last year, the holding comprised about 14% of GLW’s total income, this percentage is apt to be considerably less in 2012.

Opportunities

1. Tightened diesel engine emissions regulations: Corning develops and is securing long-term agreements for more effective diesel engine filters that will be required, in order for producers to meet stricter regulatory requirements over the next several years. Thus, sales in its Environmental business should receive a boost. For now, weakness in the light-duty market is curbing its outlook.

2. Even larger displays and notebooks: There is nowhere to go but bigger as far as LCD television sets go and Corning will be a probable beneficiary of this trend. Its production of increasingly larger size glass sheets allows it to achieve economies of scale. Corning is on the leading edge of this technology by way of a scalable architecture. In terms of notebooks, Corning ought to be at the forefront of any upturn that may stem from new operating systems or technologies, such as touchscreen. This pertains to Gorilla, as well as the core LCD glass business.

Threats

1. Competition heating up in LCD glass: As volumes have risen, the unit price of glass has steadily declined. An acceleration of this decrease is already beginning. The warding off of price deterioration would require new agreements with key customers, allowing it to maintain its advantage over Japanese rivals, Asahi Glass, Nippon Electric Glass, and Avan Strate. Asahi, the worldwide leader in automotive glass, has reported consistent earnings growth over the past few years, but also been up against challenges in 2012.

 2. A weakening of the yen currency: A one point drop in the value of the Japanese yen versus the dollar equals about $10 million less revenues. It is improbable its value will bounce back to previous levels of around 100 yen/$, but such a change would be detrimental to Corning’s top and bottom lines.

In conclusion, this 161-year-old company is still vital in today’s tech-heavy environment. In fact, Corning is poised to reap gains from advancements in televisions and computers. On the downside, innovators are always met with copycats, and new ideas must always be found. In all, the shares are currently trading at an attractive P/E valuation, and long-term focused investors may be rewarded.

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