Corning Incorporated (NYSE:GLW) is one of the leading companies that manufacture glass, ceramics, and related materials primarily for industrial and scientific applications. Much of the following analysis will revolve around Corning's Gorilla Glass market infiltration by the new Sapphire Glass invention by GT Advanced Technologies (GTAT).
A Glance at Financial Statements
When you look at Corning's financials you do not see much wrong with the company. Corning boasts strong balance sheet figures, with industry equivalent quick (4.36) and current (5.09) ratios, and a very strong debt to equity ratio. Where the industry debt to equity ratio looms around 27.40, Corning maintains it at 15.56.
In terms of full year performance, top line weakness is a point of concern; the net sales of the company dropped by an aggregate rate of 2% YoY. Evidently, Display Technologies is the most lucrative segment of the company and accounts for as much as 75% of the total net income. However, attribution to income by this segment has dropped by 8%. The segment's sales slipped 13% YoY and this trickled down to the bottom line causing a decrease of 20% to the net income of the company. Environmental Technologies remained weak as well. Optical Communications and Life Sciences showed positive performance with YoY increases of 9% and 30%, respectively. The weakness in the Specialty Materials segment was caused by a 17% drop in Gorilla Glass sales that are reflected in the 13% drop in the segment's revenues.
Any positive performance in the company's sales was overshadowed by the weak performance in Display Technologies, Environmental Technologies, and Specialty Materials segments. The following discussion is focused on Gorilla Glass sales decline.
Gorilla Glass Debate
I am sure you are aware of the entire Gorilla versus Sapphire glass battle. For those who do not know, there is a lot of hype about Apple Inc. (NASDAQ:AAPL) dumping Corning's Gorilla glass for GT Advanced Technologies' Sapphire glass in a number of its devices. Apparently, that has shaken Corning since Apple was a major customer of the company. Speculators worry that Apple's switching to Sapphire glass might decrease Corning's margins and eventually the stock price of the company.
Gorilla Glass has been the preferred choice for smartphones, tablets, notebooks and televisions in recent years. However, with the advent of the Sapphire glass Corning feels insecure as there is a high likelihood that Sapphire will replace Gorilla. Since smart device sales are on the rise and account for a considerable amount of cash flows for Corning this concern is valid. But is the company going to lose the game? I don't think so. Even if smart devices drive Gorilla Glass sales now, note that they are not the only product in which Gorilla Glass is used. The company is actively seeking new markets and expending R&D efforts in the existing markets.
In the Consumer Electronic Show held at the start of the year, Corning announced the development of new and improved Gorilla Glass that is much stronger and thinner compared to its previous versions. The company has also come up with the world's first antimicrobial cover glass that is a response to tackling hygiene concerns. A number of researches indicated that our cellphones are bacteria hubs as we share and use our phones.
The company is collaborating with Amtel Corporation (OTC:AMTL) to develop ultra-thin capacitive touchscreens with superior multi-touch performance for next-generation applications. The collaboration would combine Atmel's XSense® flexible touch sensors with the 0.4mm damage-resistant Corning Gorilla Glass. Together, they would deliver outstanding capacitive touch performance through thinner flat or curved cover glass.
In a struggle to explore other markets, Corning has recently reached an agreement with Snapcab Elevator Interior Systems. Reportedly, Snapcab will add Gorilla Glass to its modular wall panel systems that are used in residential and commercial elevators. This is the first step into the interior architecture industry that is expected to bring cash inflows into the future as the demand for lightweight designs for elevators, lobbies, and conference rooms grows. Corning has further introduced Gorilla Glass NBT for touch screen enabled laptops and notebooks. The glass' utility is also being used in the automotive industry. The BMW I8 will be the first car to use Gorilla Glass for its windows.
Lastly, Sapphire Glass is not free of flaws either. Although much research has yet to be done on it, one obvious drawback is its cost. Sapphire Glass is slightly more expensive than Gorilla Glass. Hence the advent of Sapphire will not creep into the entire handheld device market especially when the cheap smartphone market is on the rise.
Now let's take a look at the returns distributed among the shareholders. Corning's dividend yield presently stands at 1.92% compared to the industry average of 1%. The company's dividends have increased at an aggregate rate of 4.2% over the past eight quarters. The company further distributes profits among its shareholders through share repurchases. In April 2013, the company allocated an amount of $2 billion to the share repurchase program that will expire by the end of current year. During 2013, the company repurchased 35 million shares with a total worth of $500 million. The company has further entered into a $1.25 billion accelerated share repurchase (ASR) to offset the dilution related to Samsung Corning Precision Materials Co. Ltd.
In addition to that, Corning's stock price has shot up by more than 50% over the past year. The price of the stock might follow a downward trend in the short term as a consequence of the ongoing Sapphire versus Gorilla competition. The following chart shows the stock market performance of the company.
Discarding Corning simply because Sapphire Glass has entered the smartphone market would be nothing but an irrational move. Corning is not sitting still and is diversifying its revenues by penetrating into other markets using its Gorilla Glass innovations. Moreover, the company is paying good returns to investors. Lastly, most of the positive news is related to the other segments of the company as well. The company has a lot of potential to grow in my opinion.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within 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.