Corning: A Glass Darkly on the Global Economy

By Peter Pham - July 30, 2012 | Tickers: AAPL, GLW, TLT | 0 Comments

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Corning’s (NYSE: GLW) 2^nd quarter results highlight the extent to which the global economy hit the wall in the 2^nd quarter.  Among slowing LCD sales, which everyone expected, it is the slowing growth in the Specialty Glass division that is the most troublesome. Year over year revenue growth of just 5% for what is the primary growth engine for Corning is not something to write home about, even if e-mail and instant messaging are nearly free. AlphaVN’s previous profile of Corning focused on the future business of the venerable company with its incredibly important part to play in the revolution in mobile computing.  

One very encouraging sign was 10% revenue growth in their fiber optic business.  Also encouraging are the shipment numbers that will result from Gorilla glass sales in the mobile space, but this will not yet be enough to offset other divisions that are much more sensitive to a global slowdown, which looks like it’s not only coming but already here.

LCD substrate volume was up but the industry is still plagued by over-capacity.  To address this Samsung and Corning have formed a new partnership to produce LCD substrate in China, lowering costs from doing so in Korea.  But at the same time they will be moth-balling a facility in Korea; $600 million to shift production capacity.

Apple’s (NASDAQ: AAPL) huge earnings miss at both the top and bottom line underscore the prematurity of the China-led mobile revolution.  While no one doubts where this is all headed in the long-run the question is the path we take to get there.  And for the 2^nd half of 2012, the situation looks very worrying.

The problem which is rearing its head is that while China and other economies have policy room to lower interest rates and create stimulus, it will not have the same effect as it would if China’s export markets were not verging on becoming basket cases, e.g. the U.S. and Europe.  The latest GDP number from Great Britain confirms that by definition they are now officially in a recession, with Wednesday’s release of -0.7% now two consecutive quarters of negative GDP growth. 

This, of course, in the face of a £575 billion quantitative easing program and unprecedented, unlimited swaps between central banks to keep the system liquefied.  But, like the glass that Corning is so famous for producing, this is a liquid producing movement so slow that it is barely perceptible, if at all.

Supply issues in food and energy sectors will keep the Federal Reserve’s hands tied on any further monetary stimulus to support stock prices.  This has been the theme of this summer.  The moves by the other central banks and the wide open paths for the money to flow have not been enough to stave off price erosion for any except the best companies.  The strong U.S. Dollar and the mad rush into U.S. Treasuries, exemplified by the iShares Barclay’s 20+ year U.S. Treasury Bond ETF’s (NYSEMKT: TLT) 20% gain since mid-March, have pressured equities.  That trade is currently very crowded, but it can and will stay in place for as long as the Fed feels trapped by potentially high core inflation, unless there is another lock up in the interbank market.

Fundamentally, there is nothing wrong with Corning’s business, and their performance in 2012 has been right in line with company expectations and goals given the shift away from high turnover LCD screens. Buying now will be an exercise in managing expectations and being a potential 12-18 month value trap as opposed to a solid growth company because of the unique macro environment it is operating in.  Good companies are sold in times like these.  For Corning there looks to be little danger to the dividend, which is currently 2.7% and just 25% of net income.

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