What are Corning's Real Growth Prospects?
Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
After hearing the news that Apple (NASDAQ: AAPL) planned to use larger glass screens in the iPhone 5, I remembered that Corning (NYSE: GLW) manufactured iPhone glass, so I checked out Corning to see if it had investment potential as an Apple supplier. After noticing that Corning stock seemed really cheap, I did some further research to find out whether Corning's growth prospects were being underestimated.
Corning has a P/E ratio of 8 right now, but some of the glass maker's other financial statistics throw up some warning signs. Levered free cash flow is -$592 million -- a bad sign, although Corning has $6.8 billion in cash so it seems like the company has enough cash to pay its bills for now. Corning's forward P/E is 8.4, which is higher than its trailing P/E. Corning's PEG ratio, 8.1 -- seems like a major red flag. Although Corning is a mature company, this PEG statistic is very high and it suggests that Corning's income is expected to barely grow at all in the next few years. Is this a fair assumption to make?
Obviously, the iPhone 5's need for additional glass would be one of the main unexpected growth drivers for Corning, although Apple's strong sales in recent months don't seem like they've given Corning's shares much of a boost. Corning had 38 percent lower earnings in its last quarter and its shares have fallen from around $20 a year ago to less than $13 today. Fortunately for Corning, the iPhone 5 isn't the only product that might include some Gorilla Glass.
The original Gorilla Glass formula was developed about 50 years ago, and Corning has recently been showing manufacturers an updated version, which it termed Gorilla Glass 2.0. In an InvestorPlace article, Anthony John Agnello reported that several smartphone manufacturers were interested in Gorilla Glass, including Apple's main rivals. Even better for Corning, several of these companies also planned to use Gorilla Glass 2.0 in their own tablets and laptop computers. Bryan Chaffin, at the Mac Observer, reported that Corning was selling about half of the Gorilla Glass it made to Apple in November 2011.
Corning's stock has dropped because fewer people bought television sets than Corning expected, which caused Corning to lower its earnings forecasts. Corning has the potential to reverse its fortunes in the television set business, and television may also become a major growth driver for Apple as well, if Apple launches the Apple iTV. In this May 18 article at Computerworld, Jonny Evans talks about some possible hints about the Apple iTV rollout, but the exact launch date for Apple iTV -- if Apple goes ahead with the project -- is still up in the air.
Apple doesn't like to talk about who its suppliers are, so if the company does plan to use Gorilla Glass 2.0 in Apple iTV screens, it may take a while for investors to find out. Because of Apple's secrecy, the uncertain status of the Apple iTV launch, and the low growth estimates for Corning, it seems like the potential usage of Gorilla Glass 2.0 in Apple iTV screens might not be priced in for Corning's shares.
Corning shares could rally if the company becomes an iTV supplier, but investing in Corning for that reason alone would still be a speculative investment. Because Corning already makes glass for other Apple products and other manufacturers' TV sets, it does seem like a reasonable guess to make. Still, this isn't the only reason to invest in Corning. Mobile devices continue to gain popularity throughout the world, and Corning supplies several large mobile manufacturers, so it seems like Corning will sell more of its Gorilla Glass 2.0 anyway, even if the iTV doesn't show up soon.
enovinson has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Corning. Motley Fool newsletter services recommend Apple and Corning. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.