Corning: A Rough Ride Ahead?

| About: Corning Inc. (GLW)

How can a 160-year-old company known mostly for making glass become a major player in the technology sector?

CEO Wendell P. Weeks summed up how such a company now thrives in the world of technology when he reminded investors at the company's recent annual meeting that its strategy calls for growth primarily through global innovation across a balanced product portfolio.

Nowadays, Corning (NYSE:GLW) is about much more than conventional glassware and boasts an array of products. Chief among them is Gorilla Glass, which you are familiar with if you own a smartphone, as it's the substance that protects the screen. The company believes this business has the potential to more than double over the next several years. It currently accounts for 15% to 17% of sales, though in 2012 its revenues jumped more than 25% over 2011.

Corning creates leading-edge technologies for the fastest-growing markets of the world's economy. Corning manufactures optical fiber, cable and photonic products for the telecommunications industry; and high-performance displays and components for television and other communications-related industries.

A Volatile Stock

It's perhaps its exposure to the world of technology that has caused its stock price to become as volatile as a tech company. The stock traded between $22 and $23 as recently as early 2011. Its 52-week high topped out in early May 2012 at $14.58. It fell to around $11.50 in August, rebounded to $14 in late October, plummeted to under $11 a month later, and has hovered around $13 for most of this year, at a price-to-earnings ratio of 11.3.

In late January, the company announced its fourth-quarter and full-year 2012 financial results. Corning booked fourth-quarter sales of $2.15 billion, up 14% from the previous year and the largest quarterly sales in company history. Earnings per share were $0.34, the first year-over-year quarterly improvement since 2010.

For the year, sales rose moderately by 2% to just over $8 billion, while earnings per share dropped from $1.77 in 2011 to $1.15.

Corning recently completed a $1.5 billion share buyback and boosted its quarterly dividend by 20% to $0.09 per share, or $0.36 annually, which currently yields 2.8%. The company has plenty to room to raise it, as its payout ratio is only 27.

Corning has a solid balance sheet. Its quick ratio is almost 4 while its current ratio is 5, indicating a solidly liquid firm. Meanwhile it has a microscopic debt-to-equity ratio of 0.16, meaning its debt equals 16% of its equity. Corning has doubled its cash position in the last four years and ended last year at just under $5 billion.

Corning far exceeds its industry peers in several areas. Its five-year average net profit margin is 45%, almost nine times the industry average. Its five-year return on assets is 12.4%, more than three times the industry average. And its five-year average return on investments is 15%, almost three times the industry average.

Areas of Concern

One area of concern is that its core business, Display Technology, appears to be on the decline. This line produces glass for LCD and LED TVs as well as computer screens. The sector accounted for 82% of the company's net income in 2012, yet it has fallen from $3 billion in 2010 to $1.6 billion last year. To offset a 10% decline in Display earnings, the other four segments -- Telecom, Environmental Technologies, Life Sciences and Specialty Materials -- would need to grow net income by 50%.

Another problem area is Dow Corning, a company jointly owned by Corning and The Dow Chemical Company. It is a leading U.S.-based manufacturer of silicon-based products, offering more than 7,000 products and services. Dow Corning is also majority owner of Hemlock Semiconductor Group, a market leader in high purity polycrystalline silicon used in the semiconductor and solar energy industries.

Largely because of the instability in the solar industry, sales for Dow Corning fell 4.7% from 2011 to 2012, while net income dropped 29%. Gross margins have decreased each of the last three years (from 35.6% to 30.9% to 23.1%), as have net margins (18% to 10.5% to 8.9%).

Yet Corning is optimistic based on key global trends, including the need for cleaner air, advances in medical technology and the continuing proliferation of mobile devices, as well as growth prospects from the emerging markets of China, India and Brazil.

The company said that new regulations aimed at improved air quality can help its Environmental Technologies division improve profitability by more than 10% over the next several years. Corning said its Telecommunications Business Group has the potential to grow by double digits in 2013.

Company management also sees the potential to double sales of Gorilla Glass as new iterations of the technology become more available and because of anticipated growth in consumer electronics. Its Specialty Materials business grew fourth-quarter sales by 68% on a year-over-year basis largely on the strength of Gorilla Glass.

Corning also has high hopes for its Willow Glass technology, which has been in development for a decade. Willow Glass is flexible and can bend, and has potential for a variety of applications. Corning has backed up these plans with a steady increase in research and development spending, equaling $745 million last year.

Many Different Opinions

Analyst opinion of the company varies. Of the 20 analysts, five each rate it a buy or strong buy, eight have it as a hold and two more believe it's an underperform. It was downgraded twice in January. In early March, the company was upgraded by the street Ratings from hold to buy. The company cited strengths in revenue growth, financial position, valuation level and cash flow in making the upgrade.

The average opinion has Corning earning $0.24 for the current quarter and $1.18 for the full year. Corning should be around for a long time, but it doesn't appear to offer a smooth ride for investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: This article was written by an analyst at Catalyst Investments.