From Corning's Conference Call: LCD Market Update

William Trent submits: From the Corning Q3 2006 Earnings Call Transcript:

Let me now update you on the supply chain as specifically the panel inventory situation in more detail. As I mentioned earlier, we believe there was an important improvement in the panel inventory levels during Q3. This improvement is a result of seasonal and market demand and strong annual shipments. I will table my comments on the end market just a moment. I’ll start with panel shipments, as a reminder our working assumption was been a substantial portion of the panel inventory in the supply chain, was a time when these panel makers although clearly LPL had also been public about their own inventory levels. Taiwanese panel makers have reported monthly panel shipment data through Q3 and the news has been very encouraging. Many have reported record shipments in July, August and September.Inventory levels have fallen in Q3, the number of day’s inventory and probably Q1. Inventory reduction combined with seasonal demand improved with Q3 as a result of the substantial improvement in materialization rates. We believe the Taiwanese on average increased their fab utilization rates which were in the 55% range in June, 70% in July, 85% in August, and 90% in September. Although clearly not every company is operating at that level, we believe that the average utilization rate for the Taiwanese panel makers is now equal to where it was in March. Obviously the most encouraging sign has been the strong last volume we experienced in the Q3 and our expectations for Q4 based on customer orders, which I’ll talk about a few minutes.

Now let me walk you though the end market trends in Q3. As always I would like to stress we don’t have perfect information. We use a variety of sources ranging from services that are available to use, such as display research, along with retail tracking vendors, our own discussions with customers as well as our own models. With that in mind you should also note that the following data has been derived from the aggregate of industry sources that are considered at this time to be preliminary estimates. Final data for Q3 will not be available for another month or so. Be clear the data we reference relates to shipments from PC manufacturers, television set makers to the retailers.

In summary the preliminary data indicates that the end market shipments were in line with our expectations for Q3 and on track for all three primary applications, notebooks, monitors and televisions.

Starting with notebooks, about 19.6 million were shipped in Q3, in line with our expectations. This was an 11% increase over the notebook shipments in Q2. We believe the penetration of notebook computers of all computer sold in Q3 was 36% and consistent with Q2.

Moving to LCD monitors, about 32 million were shipped in Q3 compared to 13 million in Q2. We believe the penetration of LCD monitors inched up from 79% in Q2 to 82% in Q3. For LCD televisions about 10 million were shipped in Q3 also in line with our expectations. This represents an 11% increase over Q2 shipments of 9 million. More importantly is that the penetration of LCD television into the color television market was an estimated 21% for Q3. As a reminder these percentages are preliminary at this time. You may recall during our last conference call, we estimated LCD television penetration to be 19% in Q2. After reviewing the final data we conclude the penetration was actually 21%. Based on this trend and the expected strong seasonal demand we believe LCD television penetration may be as high as 25% in Q4, an average of 22% this year.

Frankly, that television penetration is higher than we expected. While that may sound like good news, to us it indicates there is less room for further growth over the long term. At the current rate of capacity expansion, the market could mature in a year or two. And given the 20% (or higher) annual price declines, the revenue growth won’t match the penetration gains.

Comments

[phwting:]

Trent is negative even on good news from Corning. The assertion that revenue growth won't match the penetration gains ignores TV size expansion.
ASP for LCD's is holding steady due to TV size expansion.
ce.seekingalpha.com/ar...
www.digitimes.com/disp...
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The 25% LCD TV penetration rate is on new TV sales on a global market of $17.3 billion in 2005 with 5% unit growth in 2006 or about $4.5 billion.
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2006 Nov 03 11:28 AM

[William Trent_:]

Judging from the monitor market, it seems likely that the penetration of LCD TVs will be in the 80% range very soon - perhaps 3-5 years. After that time, the growth is likely to approximate the growth of the overall TV market.

Each investor can decide for themselves whether Corning's current valuation (EV = 77.5x trailing FCF) is too high or too low given expectations of 3-5 years of very high growth followed by average growth in perpetuity. The terminal multiple should be about 15x, so the questions are how much operating cash flow will grow in the next 3-5 years and how much lower the Capex requirements will be when the market matures.

2006 Nov 05 12:04 PM

[phwting:]

Corning is much much more than LCD glass.
1- It's telcom division is just at break even now. When the youtube driven video over ip takes over, demand for fiber to the home will explode. And Verizon is commited to spending billions till 2010 for FTTH.
2- The environmental division is just at break even or have slight profit even when the US auto industry is in a slump. The growth sector is in diesel filters where Corning have a 50% market share so far.
3- The life sciences division is plodding along also, but it's breakthrough in aiding the biotech/pharma industry to test new drugs could change things.
4-DowCorning is 50% owned by Corning and is a major supplier of polysilicon via Hemlock Semi. Polysilicon is high demand right now for solar energy.

You are mixing two different time periods in you arguments, forward domination and slowing growth of LCD TV's and trailing earnings and free cash flow.
If LCD gets to 80% penetration in 3-5 years and growth slows down, Cornings earnings and FCF from LCD will explode since no new investments need to be made to keep increasing units 100+% yoy. i.e. $1.3 billion can be save in 2006, 2007 etc.

2006 Nov 05 01:37 PM

[William Trent_:]

Whatever businesses Corning has, the cash flow is the cash flow. Paying a high multiple for it only makes sense if it will grow significantly.

1. Most of Verizon's fiber spend is for the electronics, not the fiber itself. Besides, we were covering telecom back in 2000 when the same things were being said. Telecom equipment is a cyclical business and the fact that it is just now break-even three years into the latest up-cycle is a real concern.
2. Name 2 auto suppliers that haven't filed for bankruptcy recently.
3. Coulda shoulda woulda.
4. Thanks for the idea for a new post. We are always suspicious of 50/50 JVs accounted for under the equity method, as they are often a way of taking liabilities off the balance sheet more than anything else. Corning's past record is particularly bleak (silicon implant suits, anyone?) We haven't looked closely at Dow Corning in years, so there may be some real fodder there.

As to the last point, you make the same one as we. FCF will improve due to lower capex and operating cash flow will be higher when the market matures. The question is by how much. (And there will still be some capex, just less of it - so the $1.3 billion is only the maximum.

2006 Nov 05 08:58 PM

[phwting:]

Corning is fairly valued according to Morning Star compared with S&P 500.
It's a steal with a peg of 1.1 vs 1.7 for the S&P500 in forward valuations.
quicktake.morningstar....;Symbol=GLW&st...
Since Corning is recovering from near death, 2005 ttm data is useless.
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1- Telecom is providing the cash for Corning's business. And it will gusher more cash once they reopen the shuttered fiber plant next year. The up-cycle is just starting to kick in so earnings should rocket per incremental revenue increase above break-even.
Corning is getting $241 million in fiber and cable products in Q3 and $64 million for fiber to the premise.

2- JCI, BWA,TRW,LEA. The point is the market for diesel emissions will grow to $1.2 billion-$1.3 billion by 2010, from less than $300 million in 2006.

3- Corning is inventing a lower cost way to test drugs. This points out the innovative ways Corning's R&D gets new business and markets. This is similar to the way the LCD glass business got started when optical fiber is all the rage. Am questing your assumption that onces LCD gets to 80% penetration, Corning's growth will slow down. Even in the computer monitor business at 80% penetration, AUO just said their growth in glass area is 40% yoy in their October 06 earnings call.

4- DowCorning illustrates the limited liability features of companies that Corning uses to survive. Please take a careful look at DowCorning since there is not much public data available.

My last point about FCF is you have to compute the earnings, growth etc for a similar period in time for a fast grower like Corning. You can't use trailing 2005 FCF and match it up with estimated 2010 growth rates. Since capital spending is the question here, a better estimate is operating cash flow for 2007-2010 to go with your estimated growth rate in 2007-2010.

2006 Nov 06 04:27 PM

[William Trent_:]

What is your estimate of the cash flow?

2006 Nov 06 08:35 PM