- One of Corning's core competences is innovation.
- The company innovates in order to maintain an edge in an otherwise commoditized market.
- The company operates in partially commoditized markets and with periods of oversupply, which creates profitability cycles.
- The investor should take advantage of those cycles to invest in the company.
Companies have a heritage and set of values that are resilient to time, we should find them and understand how they are driving the company.
Corning (NYSE:GLW) is a company with 160 years of tradition in glass and ceramic products. During the past century the company has invented and developed several products related to glass. R&D is the core of the company's strategy. Corning has a track record of products that include the development of the glass used in Edison's bulb, the invention of a toughened windshield which later became the base for the LCD glass. In the 70's the company was responsible for the invention of the fiber optics. More recently the first iPhone used the Gorilla Glass developed by Corning especially for touch screen devices.
The company has developed around glass and ceramics exploiting the proprieties of both materials and its multiple different applications. Therefore, Corning is presently divided into 5 segments:
II-Corning Main Divisions
This unit is responsible for the production of glass substrates for LCD flat panel televisions, computer monitors, laptops, and other consumer electronics. Corning's glass substrates enable the thin, high-resolution, multi-function displays for current entertainment devices. As vivid organic light-emitting diode (NASDAQ:OLED) displays and next-generation liquid crystal displays (LCDs) evolve new markets are opening for the company. This unit is responsible for 32% of the sales and 75% of the operating profit.
The telecommunications division is responsible for the production of optical fiber cable, hardware and equipment for telephone and Internet communication networks. Corning is providing telecommunications network solutions, developing innovative optical connectivity solutions that deliver broadband capabilities for the Enterprise, Carrier, and Wireless markets, as well as the expanding frontier of consumer electronic devices. Corning's telecommunications technologies are expanding its focus to meet the demand in the mobile industry. This unit is responsible for 33% of the sales and 12% of the net profit.
This business unit produces Glass and plastic material for laboratories, as well as label-free technology, media, and reagents for cell culture, genomics and bio processing applications. Corning brings to market a comprehensive line of glass and plastic labware, as well as label-free technology, media, and reagents for cell culture, genomics, and bioprocessing applications. By supplying tools and research technologies, the company is committed with driving efficiency for researchers and lab technicians. This unit is responsible for 11% of the sales and 4% of the net profit.
Cover glass for consumer electronics, advanced optics, and specialty glass solutions for a number of industries. From cover glass for consumer electronics to advanced optics for high-technology industries, Corning develops customer-driven solutions. This unit is responsible for 15% of the sales and 11% of the net profit.
Ceramic substrates and diesel filters for emission control systems. The materials and process expertise in ceramic substrates have made Corning a developer of emissions-control products for the world's major manufacturers of gasoline- and diesel-powered engines and vehicles. Corning's advanced ceramic substrates and diesel particulate filters set the standard for catalytic converters and help control pollution. This unit is responsible for 12% of the sales and 8% of the profits.
III-Corning's Core Competence: Innovation
Corning drew lots of attention right after the emergence of rumors stating that the iPhone's screen glass was being supplied by Corning's Gorilla Glass (NYSE:GG) division. Many market participants have focused mainly in this product and future related products to defend the investment in Corning. For them it was all about the growth in the GG division.
My opinion is slightly different. After reading a really complete article in Strategy Business about Corning, I was convinced that the company's core competence is innovation. The article describes in detail GLW's method to bring a new line of products from scratch to the market and how they intend to launch a whole new business unit every decade. I just had to perform some double checks in order to verify the reasonability of the article's claims:
- The company's track record of innovation is fantastic;
- Management's efforts to turn ideas into business units are concrete.
- The vote of confidence provided by the board of directors, after the dotcom bubble; tranquilized me about the management's stability;
IV-Corning's Achilles' Heels: Product commoditization and over supply
On the negative side, in my opinion, it is the fact that Corning's product portfolio is partially commoditized. The focus in innovating has been a good way to avoid the company's portfolio from relying in a completely commoditized line of products. Innovation is really what is holding Corning from becoming an ordinary company. On a similar note, the fact that the company is an industry leader in a market where few buyers take the most of the production, also means that the company's orders will be exposed to the whims of a small number of buyers. This means periods of overcapacity.
The partial commoditization of the product portfolio and periods of overcapacity, lead to cycles of high profitability and low profitability. We can observe the cyclical behavior in the EBIT plus Equity in Affiliates:
Graph 1 - Corning's Cyclical Nature of its Businesses (Source: MSN Money)
In the previous graph we clearly identify the year 2009 and the year 2012 as years where excess capacity took a heavy hit in Corning's results. Usually, the company takes at least one year to adjust to the new supply & demand levels.
V - Bottom line
Corning exhibits resilience to adverse events, like the 2001 Dotcom bubble burst. The main reason relies on the innovation skills that the company has developed. Product innovation has allowed GLW to diversify its business units and at the same time it has prevented the complete commoditization of the product portfolio. However, an investor interested in investing in Corning should bear in mind that the company will always have a cyclical nature. The fact that the company is mainly a supplier of industrial producers means that it has few clients. Therefore, if one or two clients decide to reduce their orders, Corning will feel the hit and will take some time to adjust to the new demand levels.
My view is that opportunities to buy arise during lower cyclical levels, like the 2009 and 2012 lower cycles, when the shares are available at good prices. Right now the company seems to be recovering from the 2012, suggesting that higher profitability is on the horizon.
The main problem I see, right now, is the fact that the company is trading at around 16 times 2013 earnings.