This Key Supplier Just Became a Top Pick for 2013

Mohsin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Corning (NYSE: GLW) has been on a roll for the last 4 weeks. The stock has appreciated more than 20% after the company introduced a better than expected outlook for the fourth quarter. The company CEO revealed in a recent interview that Corning is pushing for the use of Gorilla Glass in cars. According to the CFO a version of the glass would be used in making windshield and windows. The company expects contracts from auto manufacturers in 2013.

As the analysis below shows, the company is already experiencing most of its growth from its Specialty Material segment. The data from Bloomberg shows that annual auto sales in the US are more than 15 million. If Corning can effectively penetrate this market, it will considerably expand its price multiple. The stock is currently trading at a P/E of 9x and considering the catalysts explained below, we can use a 12x multiple (Industry P/E 28x) to set a target price of $16. Therefore I recommend investors buy GLW for an upside of 25%.

The Rally

GLW has been on a roll for the last four months. The rally started with corning's announcement of its 3rd quarter results, in the last week of November. The real boost came from the positive Outlook for the 4th quarter. The following are key highlights of the 4th quarter Outlook:

  • The new pricing strategy will accelerate the decline in glass prices
  • An increase of 5% in Specialty glass sales as compared to earlier expectations of flat sales
  • The volume of glass to see improvement in 4Q, due to improving consumer electronic sales in China and North America
  • Expectations of a 15% increase in sales from the Life Science division due to acquisition of Discovery Labware
  • Improving margins in LCD and Gorilla glass would offset the squeezed margins in other segments and keep the gross margin flat for the quarter

 GLW data by YCharts

Corning

The American specialty materials giant Corning is involved in manufacturing glass and ceramic products. A lot of companies have not been able to cope with increasing demands of surviving in a recessionary economy and coping with changing market trends. The Display Technologies segment is Corning's largest segment and brings in approximately 35% of sales. As the chart below shows, Corning has been facing stagnant revenue growth, primarily because lack of growth in its display business. This slowdown has been driven by decline in the LCD television and PC sales.

The company has effectively managed this decline by driving growth from its Specialty Materials and Environment Technologies segment. The Lotus Glass and the Gorilla Glass have the revolutionary products which have triggered growth in the Specialty Materials segment. The company supplies these products to manufacturers of hand-held devices. The revolutionary growth in hand-held devices has therefore benefited Corning through the Specialty Materials segment and adversely affected its Display segment, due to slowdown in PC growth.

 Figure : Segment Revenues and Growth

Gorilla Surprise Package

In 1962 Corning developed a special windscreen for Cars. The product was too revolutionary for its time and could not garner the sales or adoption rates the company hoped. The car manufacturers at the time did not have enough financial incentive to replace their legacy laminated glass with Corning's product. The increased focus on fuel efficiency and economy might change all that. In a recent interview with Bloomberg Surveillance, Corning's CFO (James Flaws) revealed that Corning might be revisiting this strategy. Corning is pushing for versions of Gorilla Glass to be used as windscreens and windows of cars. According to the CFO, he expects the company to gain at least a few contracts from car manufactures in 2013. He said that the company already has samples with various car manufacturers and that they are hopeful of a positive response. According to him, gorilla glass can improve mileage and support overall performance due to its lighter weight.

Thesis and Catalyst

As the graphs above show, Corning is heavily reliant on its Specialty Material segment to drive growth. I believe the following three factors can drive growth in the Specialty Materials and LCD segments:

  1. Gorilla glass will benefit from the sales of high-end smartphones such as Nokia's (NYSE: NOK) Lumia 920, Samsung's S3 and Apple's (NASDAQ: AAPL) iPhone 5. The introduction of high-end Ultra Books and the accelerated movement towards touch based interfaces would increase the demand of Corning's Specialty Materials i.e. Gorilla glass. The market is expecting sale of approximately 200 million for iPhone 5. The Nokia Lumia 920 sales are still circumspect but reviews thus far, have been excellent. The S3 has also been selling pretty well with sales estimates in excess of 30 million; with 3rd quarter sales of 18 million.
  2. The introduction of Microsoft's (NASDAQ: MSFT) Windows 8 should result in improved sales in the LCD segment. The software giant has launched a new version of Windows after almost 5 years and for the first time the new OS would be touch based. The market has been discounting the effect of Windows 8 launch. Microsoft announced in its recent finnacial statements that it has approved more than 1000 devives for Windows 8. As the OS is touch based, it is highly likely that it will increase a demand for tougher and more long lasting glass material.
  3. The use of Gorilla Glass in cars can open up a multibillion dollar market to Corning.

 


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