Despite the delivery of growth in gorilla glass for mobile devices and computers, Corning (GLW) remains range-bound. Since September 2011, Corning shares traded between around $11.40 and $12.40. Shareholders are even giving a yield of 3% to hold Corning, and management is committed to improving shareholder value. Weak macroeconomic conditions are contributing to weak outlook for investors. LCD glass is in a mature product cycle, while polysilicon in solar is in a declining cycle. For Corning investors, this means the company will need to find other ways to grow. The market currently underestimates the other growth areas for Corning: gorilla glass and life sciences. This gives an opportunity for investors to accumulate shares in the company.
Negative Fundamentals Weigh on Shares
LCD sales and exposure to the solar sector are two areas weighing negatively on Corning. LCD weakness was especially significant in 2011, and hurt Q1/2012 results. There are two reasons to expect the LCD segment to improve. First, Corning moderated its supply and inventory levels to match reduced demand. The company even anticipates 50-inch television demand to begin growing. This may be hopeful, but the industry is highly motivated in reinvigorating demand for television screens. If successful, the demand for larger-sized televisions will benefit Corning. This would give Corning an unexpected source for renewed growth. Second, costs are being better-managed. Corning entered contractual agreements with some of its LCD customers. This helped the company better-manage operations.
Weak Solar Sector Weighs on Shares
Solar grade polysilicon pricing declined significantly in 2012. The decline extended to the end of the year, hurting fourth quarter earnings for Corning. Contract modifications with customers failed to stem uncertainty sales. The sector may begin to improve, but it will take time. China is expected to rule on February 20 the imposition of a tariff on imported polysilicon.
Impact from Customers and Competitors
Sony (SNE) suggested to Corning in 2010 that it would moderate the pricing of its televisions. By 2011, Sony chose not to reduce their pricing, which reduced the momentum for encouraging manufacturers to use Gorilla glass in TV. Corning has since adjusted its manufacturing performance.
In its smartphone segment, Sony's new Xperia Z uses Gorilla Glass on both the front and the back panels. The 4-inch Xperia J also uses Gorilla glass.
In the computing space, Corning believes Gorilla glass will be used in notebooks or touch-based notebooks. Since screens are much larger than smartphones or tablets, an introduction for the material would be highly beneficial for Corning.
New panel capacity in China by LG (LPL) did not happen as quickly as previously thought, but as larger-screen televisions grow in demand, Corning stands to benefit.
Life Sciences and the gorilla glass business are two areas offsetting Corning's weak LCD and solar segments. Corning forecasts its Life Sciences division becoming a $1 billion business. Its Gorilla Glass business grew to $1 billion in sales, up 44% from 2011 and up 15% sequentially. Smartphone growth, new products, and the remote possibility of incorporating Gorilla glass in notebooks ensure Gorilla Glass will become an even more important part of Corning's business.
Gorilla Glass 3
At CES, Corning announced Gorilla Glass 3, which comes with NDA (Native Damage Resistant). Corning touted the new glass is three-times improved in resisting scratches. This new glass will be used in smartphones and tablets starting in mid-2013.
In its fourth quarter, Corning reported gross margins of 43% (excluding special charges). The company earned $0.34 per share.
Gorilla glass demand helped Corning's Specially Materials segment grow 10% sequentially and 68% year-over-year.
For the full-year, earnings were $1.29 per share, down from $1.76 per share in 2011. Earnings were hurt by pricing declines in LCD glass and reduced equity earnings from Dow Corning. The unit experienced a 13% decline in quarterly sales of polysilicon.
Corning ended the fourth quarter with $6.1 billion in cash, which gives $4.15 of cash per share.
In 2013, Corning said that capital expenditure will decline to $1.3 billion.
Conclusion and Price Target
Corning shares touched the $11-level on 2 occasions in 2012. Shares traded recently at around $11.90 and appear to be on a bearish trend that began at the start of 2013. Investors should be reminded that the board is committed in improving shareholder value. The company completed its $15 billion share repurchase, and could renew the initiative. Over the previous 3 fiscal years, Corning increased its dividends. The company most recently increased the payout amount in the fourth quarter by 20%.
LCD sales in television could stabilize and begin to grow in 2013. Although the solar segment is another negative for Corning, shares more than reflect low expectations for any recovery in solar. Corning has a P/E of 9.4 and a forward P/E of 9.2, but could still trade back to $11. Even at current prices, the stock offers exposure for investors in the fast-growing mobile smartphone and tablet components space. At a stock price below $11, the market will have ignored the importance of Gorilla Glass for growth.