The Firsthand Alternative Energy Fund (ALTEX) with $6.7 million in assets is not a huge fund but its returns certainly big enough to grab headlines. With an 85% trailing return, it easily tops Morningstar's technology category and only trails two biotech funds. While much of the fund's success is due to gains in one position, it has also increased its bet on a leader in diversified electronic components. Corning Incorporated (GLW) should continue to see growth for its display and telecommunications segments, but the upside for specialty materials and environmental technologies drive the company's long-term potential.
A diversified electronics powerhouse
Corning supplies components across a range of product categories and reports in five business segments. Display technologies (36% of fiscal 2012 sales) provides glass components for notebook computers, LCD television and flat-panel displays. While volume growth is strong in the segment, price declines smooth the overall rate of sales growth. Management sees a 47% compound annual growth in high-performance display volumes from 2013 to 2016.
The telecom segment (27% of sales) produces fiber optic cable and components. While growth in the developed markets has moderated, the company sees strong demand in emerging markets, especially Asia and Latin America.
The environmental technologies segment (12% of sales) provides emissions and pollution control components used widely by manufacturers and in the automotive industry. With pollution becoming a serious problem across Asia and developed markets continuously increasing regulation on emission control, I see the segment as the real driver behind future growth. The company recently announced a $250 million expansion of its clean-air products facility.
The specialty materials segment (17% of sales) consists of two divisions, advanced optics and Gorilla Glass. Gorilla Glass has been a breakthrough product and has helped the segment drive growth of 25% annually. The company recently updated the product line with antimicrobial Gorilla Glass which kills up to 99% of germs on the screen without sacrificing optical and mechanical properties. The company's CFO recently estimated that the market for Gorilla Glass could reach $2 billion.
The life sciences segment (8% of sales) offers tools and component products for research and bioproduction. While acquisitions have been the primary growth driver, the company is able to use its scale and leaders in research to drive organic growth as well.
Sales and earnings have been volatile but in upward trend
Revenue growth has slowed down considerably with just 0.3% growth in sales expected this year against growth of 1.5% last year and 18.9% in 2011. Sales are volatile from year to year but have increased at a compound annual rate of 10% over the last decade.
Estimates are for sales to pick up by 6.3% in 2014 to $8.5 billion. Earnings slumped almost 27% last year and are seen 1.6% weaker this year to $1.27 per share. The consensus is for an increase of 9% in earnings next year to $1.39 per share.
Earnings volatility has increased due to the company's equity positions with a 50% interest in Samsung Corning and a partnership with the Dow Chemicals Company (DOW) in Dow Corning. Equity earnings jumped 36% in 2010 only to fall 25% to $1.5 billion in 2011 and another 45% to $810 million last year. Equity earnings could continue to make Corning earnings difficult to estimate over any given year but financial trends are strong over the longer-term
The company has a very strong balance sheet with $5.5 billion in cash and short-term investments, approximately $3.75 per share, against current liabilities of just $1.6 billion and long-term debt of $2.8 billion. Free cash flow has remained strong even during the weaker recent history. Besides the $584 million paid out as dividends, the company recently announced another $2 billion for its repurchase program which could reduce share count by as much as 9%.
The company's operating margin of 18% is higher than 95% of peers within the industry and shares trade at a cheap 11.6 times trailing earnings, well under the industry average of 23 times trailing. Working through expectations, it becomes clear that the shares could be worth significantly more on the upside to sales or margins. Modeling $8.6 billion in 2014 revenue, just above current estimates, and a 5% reduction in shares on the repurchase leads to $1.49 in earnings and a share price of $17.86 per share. This is 19% above the current price and assuming no improvement in margins which have been lower than the company's historical averages.
The FirstHand Alternative Fund is not the only one with a positive outlook on Corning. Shares owned by funds increased 7% last quarter to 556 million while institutional investors increased their holdings by 4% to 1.14 billion shares. In all, mutual funds and institutional investors control 74% of the shares outstanding.
Corning's diversification across five business segments and strength in research makes it a popular pick by mutual funds and institutional investors. Despite some earnings volatility due to equity earnings, the company's long-term financials are solid and management has made a strong commitment of returning cash to shareholders. The shares could be almost 20% undervalued on 2014 earnings with conservative estimates of revenue increase and share reduction.