- The effects of GLW’s buyout of Samsung’s share of their LCD glass joint venture will continue to benefit GLW in the near and intermediate term.
- Concern over sapphire crystal replacing Gorilla Glass in hand held devices is overdone given an increasing market for Gorilla Glass in non hand held product markets.
- Any failure of GLW management to maximize shareholder value may result in large investors calling for a break up of GLW or in a company taking over GLW.
- A recent history of dividend increases and share buybacks will reward investors as they wait for GLW’s transformative actions to take effect.
Corning (NYSE:GLW) is a company over 100 years old and has a long storied history of research and development that allows the company to consistently reinvent itself. GLW's share price has moved up about 24 percent year to date. Later this week, GLW will announce earnings. Let us look at GLW and recent developments for the company.
GLW is divided into the following divisions: display technologies, optical communications, specialty materials, environmental technologies, and life sciences. The display technologies division represented 32 percent 2013 sales and the products of this division are used primarily in notebook computers, flat panel desktop monitors and LCD televisions. The optical communications division represented 30 percent of GLW's 2013 sales and the products from this division include optical fiber and cable, and hardware and equipment as well as optical solutions for the broader communications industry. The environmental technologies division represented 12 percent of 2013 sales and the products from this division include ceramic substrates and filter products for emissions control in mobile and stationary applications. The specialty materials division represented 15 percent of 2013 sales and the products from this division include material formulations for glass (including Gorilla Glass), glass ceramics and fluoride crystals. The life sciences segment represented 11 percent of 2013 sales and the products from this division include general lab ware and equipment, as well as specialty surfaces, media and reagents that are used for cell culture research, bioprocessing, genomics, drug discovery, microbiology and chemistry.
The Samsung-Corning Precision Glass Transaction
In October 2013, GLW shares surged almost 15 percent after the company announced that they would buy out the 43 percent share of a joint venture to make LCD glass held by Samsung Display, a subsidiary of Samsung Electronics, with Samsung taking a 7.4 percent stake in GLW. Through Samsung taking a stake in GLW convertible preferred shares, GLW received $1.2 billion in cash on the books of the joint venture, and added "approximately $2 billion in annual sales; $350 million in incremental profit before special items; and approximately $500 million in additional cash flow to Corning," with $100 million in pre-tax savings from "synergies" by 2015. At that time, GLW's board of directors authorized $2 billion in share buybacks through 2015 in conjunction with the deal.
At the time of the transaction, analysts viewed GLW's buyout of their joint venture partner as an excellent deal given the amount paid by GLW. They viewed the announcement to control 100 percent of the joint venture as a bold move that was materially positive for GLW shares, unlocking significant shareholder value associated with the joint venture, accelerated free cash flow generation, and providing the company with significant strategic flexibility to drive future growth, realize cost synergies, simplify the investment story, and enhance profitability. Further, analysts saw GLW's aggressive share repurchase allotments ($3.5 billion in total post the joint-venture buyout) as offering downside protection to shares. GLW indicated that the transaction would allow them to increase their competitive positioning and stabilize their market share. At the time of the earnings announcement the CEO stated that the company expected "improved results throughout the year."
First Quarter Earnings Announcement
In late April 2014, GLW announced their 2014 first quarter earnings including the results for each of their divisions. GLW's display technologies division core sales were $1 billion, a 58 percent increase from core sales of $650 million a year ago, primarily as a result of the GLW buy out of the Samsung-Corning joint venture. Total LCD glass volume grew by low single digits on a year-over-year basis, but as anticipated, sequential LCD glass price declines in the quarter were higher than those in previous quarters. The GLW optical communications division sales were $593 million, a 26 percent increase from $470 million in the same 2013 quarter. The increase was driven primarily by continued strength in carrier network sales. The GLW environmental technologies division sales were $275 million, a 21 percent increased compared with $228 million in the 2013 first quarter. Net income was up 59% due primarily to increased sales and improved manufacturing efficiencies. Sales in GLW's specialty materials segment were $261 million, a slight increase from 2013 first-quarter results. GLW's life sciences division sales were $210 million, also a slight increase over those in the same 2013 quarter. Finally, core equity earnings from GLW's Dow Corning Corporation joint venture increased 40 percent over first-quarter 2013.
Investor's Gorilla Glass Anxiety
Currently, GLW provides their Gorilla Glass for the displays of numerous hand held device brands, including the Apple, Inc. (NASDAQ:AAPL) iPhone. AAPL entered into an agreement in late 2013 with GT Advanced Technologies, Inc. (GTAT) whereby GTAT would supply AAPL with sapphire crystal for AAPL's products. In 2014, AAPL announced plans to build a sapphire manufacturing facility and filed a patent application for sapphire-related technology. These reports fueled rumors that the iPhone 6, expected in fall of 2014, would have a sapphire screen.
Although there is no confirmation as to what the iPhone 6 screens will be made of, GLW responded by making a video available on its website comparing the strength of Gorilla Glass to that of sapphire glass to demonstrate its argument that Gorilla Glass is superior. Sapphire, however, is known to have many disadvantages when compared to Gorilla Glass. Sapphire is about ten times more expensive and is about 1.6 times heavier. Making Sapphire is environmentally unfriendly as it takes about 100 times more energy to generate a sapphire crystal than it does glass. Sapphire transmits less light, which means either dimmer devices or shorter battery life. Regardless of concerns over some companies switching from Gorilla Glass to sapphire crystal, the uses for Gorilla Glass is expanding outside of the handheld devices market and any switchover will likely be limited to a select set of more expensive products.
GLW faces competitive and non-competitive risks that include: 1) the profit margin for LCD Glass, which represents a substantial portion of GLW sales, has been affected by significant price declines (but GLW expects the price declines to be moderate in the future); 2) the fluctuating value of the Japanese Yen can negatively affect margins, (but GLW hedges such risk by reducing their exposure to foreign exchange risk); 3) the possibility that handheld device manufacturers will use sapphire crystal for their screens instead of Gorilla Glass (but GLW recognizes that sapphire crystal has significant disadvantages and that use of Gorilla Glass in non handheld device markets is expanding); and 4) the failure to invest resources in research and development to compete in and establish product markets (but GLW has a long history of recognizing the value of investing in research and development).
Potential for Transformative Actions by GLW or by Outside Investors
Some commentators and analysts believe that GLW is a takeover candidate. Those analysts believe that a private equity firm or a corporate buyer may be interested in such an acquisition given that GLW has a strong free cash flow yield, proprietary products, a relatively depressed market valuation and potential for a turnaround. For example, with Samsung holding a 7.4 percent stake in GLW, some analysts are asking whether Samsung will acquire the company.
Analysts believe that, under different leadership, GLW can be made into a faster growing company or the company could be broken up. In particular, those analysts believe that GLW's share price could rise significantly if the company divested itself of their large LCD glass division. Such division makes and sells the commodity product LCD glass and accounts for a large portion of the company's revenues. The market for LCD glass, while expected to continue growing, is becoming more competitive. GLW's LCD glass division continues to be profitable and such profitability makes a sale or spin-off of the division possible. Revenue from the other GLW divisions are from more growth oriented markets, including cell phone glass, ceramic materials that reduce car emissions, and proprietary photonic equipment used in telecommunications. Each of these GLW divisions have the potential to grow by 15 percent to 20 percent a year and would allow GLW a much higher price to earnings multiple if the LCD glass division were no longer a part of the company.
Analysts' Views and Our Views
Among analysts who follow GLW, there are six that rate the company as a "strong buy." Ten others analysts rate GLW as a "hold." Among the more bullish GLW analysts, current price targets range as high as $27 a share.
GLW has a trailing price to earnings ratio of about 18. The forward price to earnings ratio is about 13.2 based on currently projected 2015 earnings estimate of $1.67 share. GLW also has a recent history of annual dividend increases and substantial share buybacks at reasonable share prices. We believe that GLW will make an excellent long-term investment for anyone purchasing GLW shares. With overall markets at all time highs, we would prefer that investors wait for GLW shares to drop to a price between $19 and $21 before establishing a full long-term position. We also agree with those analysts and commentators that, if GLW is unable to maximize shareholder value in a sufficient time frame: 1) a large investor may push GLW management to spinoff parts of the company; or 2) a large company such as Samsung may takeover GLW.
Disclosure: The author is long GLW. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.