Corning Crosses Value to Growth
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It’s hard for some to see it from the latest earnings report issued by Corning (NYSE: GLW) but the future is very bright for the venerable company who has been completely transformed by the rise of personal computing.
Corning’s story doesn’t have much to say about its competition, because it really doesn’t have many in the space where their products dominate, LCD and touchscreen glass. The bad news is that the LCD business was down 10% year-over-year, but the good news for Corning investors is their non-LCD business is growing steadily, if unspectacularly, now accounting for 48% of total sales and 19% of net income. The 4 non-LCD verticals’ revenue growth is growing faster, however, than the LCD business is shrinking.
The 800 Micro Meter Gorilla in the Room
Corning’s pricing issues in the LCD glass segment owed more to a reduction in vendor inventories than it did to the shrinking LCD TV and monitor business. The average inventories for Corning’s LCD screen customers dropped from 26 weeks of supply to 13. So, in the longer term this will not work to grind down margins or sales. I’ll be watching the next quarter’s report closely for more evidence of this.
Where the value exists for Corning is not in the past, but, like all technology stocks, the future. Its Gorilla Glass, part of the Specialty Glass division and the glass used in almost all touchscreen devices, is what has investors’ ears perking up. So, that’s every iPhone and iPad Apple (NASDAQ: AAPL) makes and every new touch-enabled laptop, smartphone or desktop running Microsoft’s (NASDAQ: MSFT) Windows 8. Gorilla Glass sales nearly tripled in 2011 due to the explosion of the iPad and iPhone.
Mobile devices are replaced at a far higher rate than TVs and computer monitors. Putting it all together and we have an expanding market for their highest margin item which has a higher turnover rate supporting long-term demand. Do I really have to say much more?
Yes, actually. With the release of their Gorilla Glass 2, 20% thinner and just as strong, Corning stands at the center of a continuing revolution in computing device portability which, I feel, is what will further drive sales. Form factor matters. Touch sensitivity matters. Apple’s new Retina display looks better with 20% less glass between you and the image. Moreover, since the original material was from technology derived from the 1960’s, the new material is now under patent protection. Apple, Asus, Acer and LG have committed to switching to the new material.
Through the Looking Glass
The leading technology companies are all looking to push glass technology forward. Apple wants curved glass displays. Microsoft wants computing everywhere. Things that were the province of science-fiction films are just a few years away from the market. And that market is set to explode.
Apple’s iMac sales are pointing towards the future of the PC world if Windows 8’s Metro UI is met with approval in the portable device market.
For many Southeast Asians in emerging markets like China and Vietnam, their smartphone is the first computing device they will likely touch, no less own. That interface will be their default way they interact with a computer and it only makes sense that they will gravitate towards that for their home device, if they even want a home device that is not their tablet. There are a great number of tasks that require a keyboard or a mouse, but as glass technology advances and with it the touchscreen itself, that number will drop. Computers will need to become a more organic part of the home, without all of the bulk and clutter of the current incarnations. We’re at an inflection point where the form of the device will support its function.
No Ceilings Here
Looking at their income statement Asia-Pacific already accounts for 62% of their business, with China’s doubling last year. Long-term assets in China doubled as well, but are tiny compared to their assets in South Korea and Taiwan. Corning Shanghai just opened their latest expansion to their automotive substrate facility in Shanghai simultaneously breaking ground on the next phase of the expansion. Corning’s substrates are used in making the catalytic converters in cars.
Corning has net cash on hand that amounts to $4 per share, is trading at a multiple of 8 while paying a 2.3% dividend. The new Gorilla Glass gives them a differentiated product in the portable device market and for new markets like the rumored TV from Apple. Let us not forget the product line refresh that is coming down the pike from Apple either. Sales of traditional LCD screens may stay under pressure in the medium term while the market sorts itself out, but as China and the rest of Southeast Asia expand their middle class, Corning’s business should grow with it.
PeterPham8 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Corning, and Microsoft. Motley Fool newsletter services recommend Apple, Corning, and Microsoft. 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.