Use Any Weakness To Buy Corning's Strength

| About: Corning Inc. (GLW)

Corning (NYSE:GLW) is the company behind one of the most important components in smartphones and tablets, with its ubiquitous Gorilla Glass making up the screens of everything from Apple (NASDAQ:AAPL) iPhones to Amazon (NASDAQ:AMZN) Kindles. This innovative product has earned a place in these devices due to its unique combination of strength, hardness, and scratch resistance, and the company continues to improve upon it with a thinner, more touch sensitive encore, as well as a third generation with even more scratch and glare reduction.

Despite its strong market share and the proliferation of mobile devices, Corning is actually trading below its average price of the past several years, which is to be expected since its earnings have come down since peaking in 2010. However, I believe this dropoff due to adverse market conditions is temporary and overstated since revenue has continued to increase, driven by Gorilla Glass exceeding $1B in annual sales.

As gross margins continue to remain above 40%, Corning should be able to leverage this revenue growth to resume its earnings growth path as R&D and administrative spending stabilize after a large non-recurring charge related to a corporate restructuring at the end of last year. Notwithstanding the impact of this charge on that quarter's earnings, there has been a steady quarterly increase in earnings over the past year, leading to a solid 2012 EPS of $1.29, good enough for a trailing P/E ratio below 10. Despite this recent strength, Analysts are still expecting a decline in earnings for 2013 to around $1.18/share before ticking back up to around $1.28 for 2014.

This kind of consistently boring earnings is certainly not appreciated or rewarded by Wall Street nowadays, as it seems the market would rather chase higher octane but more unpredictable growth like at Amazon, Netflix (NASDAQ:NFLX), or LinkedIn (NYSE:LNKD). However, if Corning's earnings growth can at least follow recent revenue growth, perhaps even being aided by ongoing share buybacks, the company could resume growing earnings at a double digit clip in the future on the strength of continually growing revenue attributable to Gorilla Glass, barring the entrance of a superior product into the marketplace.

One such potential threat that has been mentioned is Japan's Asahi Glass Company's Dragontrail Glass. While this product's name sounds like something out of HBO's Game of Thrones, it is reputed to be at least as strong as Gorilla Glass and possibly clearer and more scratch resistant. However, although it was released back at the beginning of 2011 with company projections of at least $350M in 2012 sales and an eventual market share of over 30%, it has almost certainly not made nearly that big an impact, with the most recent press release only just now stating that a manufacturing facility will be opening soon. And while it will supposedly be used on the Sony Xperia Z, it is interesting to note that Gorilla Glass will still be used on the back of this device.

This reluctance to fully embrace a new product seems to speak to the entrenched dominance of Gorilla Glass and bode well for Corning. I don't want to make the same mistake Apple and its shareholders made and completely discount the competition, but Asahi's ambition to attain 30% market share has proven to be much more difficult than the company anticipated. Furthermore, with the stakes so high in the raging mobile device war, the big players are not likely to take the chance that an untested supplier could derail a major product launch, like we saw glimpses of last year with Apple's iPhone 5 launch being affected by supply constraints, and are currently seeing again this year with Google's (NASDAQ:GOOG) popular Nexus 4.

Another interesting angle is the development of Corning's Willow Glass, a flexible product that has been linked to Apple's supposed snap bracelet like iWatch. I think the economic impact of this development might be less than expected, but the nice thing is that at the current market price you're not really paying any extra for that potential. The strength of Corning's current products, which also includes Lotus Glass, a substrate that can be used in tandem with Gorilla Glass for higher resolution and faster response time in applications like LCD screens for flatscreen TVs, are more than enough to support its current valuation and drive future growth for years to come.

In conclusion, expectations are so low and the addressable market opportunity is still so large that I would look to buy Corning on any weakness, perceived or actual, since I think its dominant position as a critical component of the still growing mobile revolution is fairly secure, even though its stock is currently being priced like it is not. As a complimentary piece to this article I encourage you to read George Kesarios' excellent recent article for a more in depth technical look at Corning to help you get a better idea of when exactly to buy this excellent company that I believe has overstated competition and understated growth prospects.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GLW over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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