By Brendan Coffey
I admit that I’ve long been a big fan of Apple (AAPL) products, especially the iPhone, which allowed me to whittle down three things I often carried — cell phone, Handspring PDA (remember those?) and a point-and-shoot camera — to just one. And designing such compelling products has done well by shareholders of Apple. The stock has more than quintupled since June 2005, when the company announced it was switching to faster, more energy efficient Intel (INTC)-based chips for its computers, from the IBM (IBM)-supplied G-series.
If the introduction of the first iPhone, unveiled in January 2007, spurred you to buy the stock, you’re up about 160%. Since the unveiling of the iPad this January, shares are up 22%. iPads are selling so well, one industry analyst, iSuppli, projected in late July that Apple will have sold 100 million of the tablet PCs by the end of 2012. Apple sold 3.3 million of the iPads in the first quarter that they were in stores. It’s pretty clear Apple is on a winning streak, executing its business plan to near-perfection.
I like Apple as a stock, but what particularly interests me today is the fact that for Apple to execute so successfully, many other companies have to hit their marks as well. As Editor of Cabot Green Investor, which invests in alternative energy and related stocks, I find it fascinating that many of the items used in the iPad are also playing a part in the transformation of our a fossil-fuel dependent society to a cleaner, more renewable one. There are three stocks in particular that we can reasonably infer have some role in the iPad, although we can’t be certain because of Apple non-disclosure agreements with some suppliers.
One is Polypore (PPO), a North Carolina-based company that makes sophisticated filters and separators for use in lithium-ion batteries. According to analyst Craig Irwin at Wedbush Morgan, Polypore supplies the separators for the iPad’s li-ion battery (Polypore hasn’t confirmed this). Irwin’s revelation last week gave shares of PPO about a 10% boost. Cabot Green Investor subscribers bought Polypore in June, making the Apple connection a welcome bonus to what we already saw as a compelling investment.
That’s because lithium-ion batteries are the next generation of batteries that will eventually all but eliminate the lead-acid battery we use in most applications today. Li-ion batteries can be more fully charged more often than lead-acid batteries, lose their charge more slowly when not in use and are generally much lighter for the power they can store than comparable lead acid batteries. In the iPad, li-ions offer over 10 hours of operation on one charge, by some accounts.
The real growth market for li-ion batteries is in automobiles, especially as electric cars like the Nissan (NSANY.PK) Leaf and hybrids like the Chevrolet Volt roll out. Last fall, another brokerage, AT Kearney, estimated the market for li-ion batteries in automobiles was just $32 million in 2009, but will skyrocket 700-fold to $22 billion by 2015 and then $74 billion by next decade.
Polypore is a leading supplier of separators for lead-acid automobile batteries already, making the shift into the more sophisticated, higher margin li-ion business a natural transition. It also makes filters and separators for the food and beverage industry, membranes needed in the pharmaceutical industry and filters to remove waste products from blood. Lead acid batteries remain a growth area too, thanks to Asian industrial demand. Polypore easily beat Wall Street expectations in its latest quarter, reported two weeks ago, posting sales of $150.1 million and earnings per share of 33 cents. For the full year, we see sales rising as much as 20% to over $600 million, while posting $1.22 or more in per-share profit.
Market watchers speculate that another key component of the iPad actually got its start in the 1960s as a way to solve the problem of Ma Bell’s phone booth glass being shattered by vandals. That market fizzled, regular glass being much cheaper, but the product was revived when executives saw a market in the smart phone revolution.
The product is called Gorilla glass, and Corning (GLW), the venerable upstate New York firm that has been thriving on fiber optics and liquid crystal display glass, makes it. The story with Gorilla glass, true or not, is that in the early 1960s, one Corning executive quipped to another “The problem with glass is that it breaks.” The other replied in seriousness, “Why don’t you do something about that?”
The result was Chemcor, a glass that was hardened in a proprietary, environmentally friendly method developed by Corning that made it very hard to break, scratch or puncture. Back then, the company was so proud of it they sent films of scientists trying to break Chemcor glass to television stations around the country. But no one bought it.
Revived and tweaked and re-introduced to the market late last year under the more marketing-friendly name Gorilla glass, it can be produced to be thinner than a dime, while being resistant to cracking when dropped and not losing effectiveness after long periods of touch screen usage.
Corning so far has 19 customers for Gorilla glass, most of which it cannot name because of non-disclosure agreements and presumably Apple is in that group. We do know the popular Droid smart phone uses Gorilla glass, as well as Dell (DELL), Samsung (SSNLF.PK) (which also supplies some iPad components) and LG (LPL), among other companies.
Regardless of whether Apple uses Gorilla glass or some alternative, so far this year, Gorilla glass sales amounted to $250 million in the first two quarters for Corning. Many analysts, myself included, believe Gorilla glass can be a $1 billion business in 2011 thanks to both smart phones and touch screen markets, as well as a planned rollout of ultrathin, stylish flat panel televisions with what I think will be a compelling feature — because Gorilla glass is so tough, TVs will be made without frames.
Corning’s other businesses have been doing well too: LCD glass sales have held up better than anyone expected (and the Cabot Green Investor portfolio made a 15% profit on Corning last year having correctly seen that LCD TV sales were holding up); environmental products, primarily ceramic substrates, have grown strong double digits this year. To boot, for those with a strong inclination to Green stocks, Corning owns a chunk of Hemlock Semiconductor, one of the world’s largest suppliers of polysilicon, a primary solar panel material. Corning, at 17 a share, sports a price-to-earnings ratio of just 9, a bargain. My subscribers added it Friday.
My third iPad related stock is one for which there is little evidence it’s in the Apple supply chain, but there is no doubt it’s a leader in a crucial technology for the iPad and many other products — LEDs (or light-emitting diodes). The company is an Illinois firm called Rubicon Technology (RBCN). Rubicon is the primary supplier of sapphire substrate in the western hemisphere.
Artificially grown sapphire is coveted as a base on which to build LED lights because it is very hard, second only to diamonds, and produces the brightest white, blue and green light. Sapphire also withstands very high heat and other extreme conditions while continuing to offer exceptional light clarity. The biotech and defense industries in particular prize sapphire LED lights. LEDs, as you’ve probably heard, are electricity-sipping lights that allow ultrathin products like the iPad, iPhone and others to have a reasonable battery life.
Overall, LEDs are expected to grow into a multi-billion-dollar market by decade’s end as everyone from carmakers to municipalities change over to LEDs from compact fluorescent lights (CFLs) and older light bulbs. Not only do LEDs use 60% to 80% less electricity than traditional lightbulbs, they can last 30 to 40 years, meaning cities save on labor costs of replacing bulbs.
Rubicon has a proprietary growth system for its sapphire (real sapphire is too flawed to use for LEDs) that grows six-inch and eight-inch wafers and is evolving toward 12-inch wafers too. Larger wafer sizes allow faster production of LEDs by providing more surface area, so while two- and four-inch wafers have been the industry standard, the industry is shifting to larger wafers. Right now, the market for sapphire is very tight and has allowed Rubicon to post excellent results.
Last week, Rubicon reported a 400% rise in second quarter sales over 2009, to $15.8 million, and an expectations-besting 18 cents a share net income. The company also raised its guidance for the current quarter and stated it sees improving sapphire pricing power ahead. Shares have been sold down the past week on weakness in other LED industry stocks, but Rubicon shares have held up technically and we like that management has executed very well in a difficult environment. Whether or not its products are ending up in the iPad, Rubicon too is a buy.
Disclosure: No positions