Corning Incorporated (NYSE:GLW), manufacturer of specialty glass, ceramics and related materials and best known currently for its Gorilla Glass smartphone component, came across my accumulation filter back in 2012, as I weighed what to roll out of Apple (NASDAQ:AAPL) and into. While I pondered, I missed the moment and the downward trend in AAPL had begun and it was quite awhile before I could make this move. By the time AAPL had recovered to a level I was happy with liquidating at, I had moved on from my GLW thesis, for good or bad. In the last year GLW had a run of +47.36%, so I hope whatever move I made was nearly as good a move as this.
What has complicated GLW in the recent past is the rumor that Gorilla Glass will not be a part of the Apple iPhone 6. While Alcaraz Research says GLW will prosper with or without AAPL, what is easy to see after the earnings release is that while profits may have fallen a bit on higher operating expenses, revenues increased 26% in Q1 2014, and expectations are high for continued core earnings growth.
While GAAP earnings performance were significantly impacted by foreign currency effects, core earnings and earnings per share both rose by 7%. Display Technologies segment core (non-GAAP) sales were $1 billion, a 58% increase from core sales of $650 million a year ago, primarily as a result of the consolidation of Corning Precision Materials during the quarter. Optical Communications sales increased 26% to $593m. Environmental Technologies sales increased 21% to $275m. Core equity earnings from Dow Corning Corporation increased 40% in Q1 2014 compared to Q1 2013, and Specialty Materials and Life Science segment sales increased slightly over Q1 2013 results.
Looking ahead, GLW expects LCD glass sales to be up by a high single-digit percentage and price declines are expected to be less than declines in Q1 2014. An increase in Optical Communications sales is expected in the single-digit percentage range while Environmental Technologies are expected to grow by the low to mid teens percentage range. In Specialty Materials, the home of the Gorilla Glass product, sales are expected to increase by up to 25% as customer inventory buildup effects GLW experienced in 2012 and 2013 wear off.
"We would expect that Gorilla price declines to moderate very significantly as we go forward into Q2," said CEO and Chairman Wendell Weeks on the conference call. "Specifically on price, we a had much larger than normal price decline in Q1 and Gorilla due to us wrapping up full year contracts to maintain our market position. And what led to that really is just competitors being more aggressive on price than they have been, they've always been pretty aggressive but they found a new level of aggression for this round."
In discussion of the evolution of thinner Gorilla Glass products, Mr. Weeks added, "If you look at us broadly, what we would like to do is use that to continue to drive our costs, lower our customer costs but also open up the opportunity for us to exploit new markets with assets that we've created purely through our own productivity - it's just great for shareholders and great for our ability to develop new markets."
The consensus forecast of analysts calls for EPS of $1.47 on revenues of $10.08 billion for the year. For the second quarter, analysts estimate EPS at $0.36 on $2.51 billion in revenue
When I look at GLW through the prism of my most used metrics (via Yahoo Finance), the PEG is 0.91 and Price/Book of 1.37, both very solid numbers. The Current Ratio of 5.09 is bulletproof and the 75% of the outstanding share float is owned by Institutional Shareholders and Mutual Funds, but a 7% decline in the latest reporting period may represent the fears of the loss of the iPhone 6. The Analyst Mean recommendation is currently 2.5, a bit more conservative than my own grading at this point, possibly for the same reason.
If Alcaraz Research and other GLW bulls are right that GLW's contracts with other smartphone makers, along with Apple's declining market share, can more than outweigh the costs of losing the iPhone 6, then GLW should continue to be a stable long-horizon holding, and accumulating at these levels (including the 1.90% dividend yield) is a very good strategy. High gross profit margins, rising net income growth, conservative debt levels, continued earnings per share growth and out-performance versus the S&P 500 show that hesitation on GLW previously was my mistake, one that I do not aim to make again.