Corning (GLW) is one of the largest glass, chemicals and ceramic makers in the world. The company has annual sales of around $8 billion a year with a great net profit margin of 25-30%. Corning stock has fallen around 50% from its peak in 2008 and is currently trading at $12.60. The major reason for the fall is the sharp price decline in the LCD /LED industry. This has forced Corning to cut the price at which it sells its bread and butter glass to the display industry.
However things seem to be bottoming out and the company is rapidly growing its Gorilla segment. Corning has strategically started making investments into potential multi-hundred million dollar businesses of solar panel glass and OLED. We think that Corning is at a cyclical bottom and offers a good return with very low risks. Corning also offers a good dividend yield like some other large technology companies (Intel (INTC),Microsoft (MSFT) ). However unlike the other technology stocks, it does not face the same competitive pressures (from tablets).
Why Corning has been performing badly
- Dow Corning - The 50%:50% JV with Dow Chemicals makes most of its money from Hemlock which is the largest producer of polysilicon in the world. However polysilicon prices have collapsed from $400/kg in 2008 to around $15/kg now. So a 80% GM margin business has suddenly become a loss making one, leading to a substantial erosion of profits for Dow Corning. However polysilicon capacity is being taken offline, as 90% of the smaller Chinese companies have stopped production. One of the biggest players, LDK halted its billion dollar polysilicon plant, as it can't even meet the variable costs of the business.
- Problems at large South Korean customer - The Company has reported problems at a big customer in South Korea (we think LG). The company's other big customers in Japan are also reporting billion dollar losses which is hurting Corning's glass volumes.
- Price declines in LCD Glass - Corning makes most of its money from selling glass to the LCD and LED industry with Gross Margins of over 50%. The company has a quasi monopoly in the industry, something similar to what Intel has in the chip industry. The other players can't effectively compete with Corning in technology and costs. This is the reason that despite severe price declines and losses in the LCD industry (Sharp is almost bankrupt), Corning has managed to get through relatively unscathed. Like the chip industry, the LCD industry goes through periodic up and down cycles. It is currently in the downturn phase now. The trough should end soon and Corning will benefit.
What we like about Corning
a) Gorilla - Gorilla glass has become the de facto standard for all decent mobile phones and tablets in the industry. Gorilla glass shows the tremendous strength of Corning in the glass industry and its ability to build a multi-hundred million dollar business from zero in a short duration. The company's sales in the specialty materials segment has grown at an awesome clip with great margins. In the most recent quarter,sales were up an astonishing 55% y/y. The growth of tablets and smartphones is not going to stop anytime soon and Corning will continue to reap the gains.
b) LCD glass volume growth - Corning's strongest division is its LCD glass division. Corning has not been immune to the pain being felt by its customer's and has been forced to decrease the prices of LCD glass. However, the volumes are growing. This is being driven by the increasing penetration of LCD in emerging countries (India and China)and changing consumer preference towards larger screens. The sharp price decline in LCD glass due to overcapacity has been factored in the stock which has fallen by almost 50% from its peak.
c) Environment, Life Science and Telecom units are showing improving profitability - The non LCD Glass divisions of Corning are undervalued as they have lower gross margins than the main division. However GM in these businesses is slowing improving. We think that the company can generate more value by divesting these divisions through spinoffs or outright sales.
d) Strong Partners - Corning's Joint Ventures with Dow and Samsung not only drive solid earnings and dividends, but also provide strong opportunities for future growth.
e) OLEDs and Solar Panel Glass - Corning has already positioned itself to take advantage of the growth in OLED devices. Corning is supplying glass to Samsung's mobile division for OLEDs. Like Gorilla, the growth here could be fast and furious. Same thing is applicable for the solar panel glass industry, where Corning has been researching a new product.
- The company raised its guidance on Nov 27, 2012 due to higher volumes in LCD Glass and Gorilla segments
- Selling the telecom, environmental science and life sciences businesses. We feel that the market does not appreciate the value of these segments.
- Recovery in the Display industry which is growing through a cyclical downturn.
Valuation and Summary
In 2011, Corning generated more than $3 billion in Operating Cash Flow on earnings of around $3.6 billion. This has allowed Corning to significantly ratchet up cash dividends to shareholders which are up 80% y/y. Valuation of Corning is not expensive at around 10 times P/E and a dividend yield of around 3%. Unlike other technology companies, Corning has a solid moat around its business model and high entry barriers. The company has started to return cash to shareholders through both buybacks and dividends (2.8% yield). While we don't think GLW is a multibagger, the company should give a decent double digit return with low risks.