Corning (GLW) is one of the largest producers of glass in the world. It was founded in 1851 as Corning Glass Works. Over 160 years old, it has transitioned from being just a glass manufacturer to a technology company and renamed itself Corning, Inc. in 1989. It manufactures glass for liquid crystal displays used in laptops, flat planet monitors & LCD televisions; optical fiber & cable for telecommunications; ceramic substrates & filters for emissions controls in gasoline & diesel engines; specialized glass products for use in semi-conductor industry and specialized equipment for use in life sciences laboratories for drug discovery.
Its most talked about product is Gorilla Glass, a strong, scratch-resistant thin glass sheet that serves as a protective cover glass for touch screen smart-phones and tablets, including the Apple (AAPL) iPhone, iPad and Samsung (OTC:SSNLF) Galaxy tablets. Competitors of Gorilla Glass have yet to see any serious adoption and Corning is actually struggling to meet all the smart-phone and tablet demand. And Corning estimates that output of Gorilla Glass will triple or quadruple by 2014.
Corning has exceptional fundamentals with 21% y/y revenue growth and 7.6% average annual growth over past five years. It has delivered 42% EPS growth on an annualized basis over the past five years. Its y/y EPS is only 2% due to a reduction in demand for LCD displays by one of its joint-venture subsidiaries with Samsung (more on that later).
Its operating metrics are far superior to anyone else's in their industry. With net-profit margin of 39% compared to 7.30% for Electronics & Equipments Industry and operating margin of 23% compared to 9.88%, Corning is one of the best run companies in the industry. Corning’s TTM return on equity at 16% is not bad either.
Corning has a pristine balance sheet. Its debt-equity ratio of 11% is less than a third of the industry average. It has substantial amounts of cash on its books with a current ratio of over 4 and the company generated over $2 billion in free cash flow in 2011.
Yet, Mr. Market has punished the stock largely based on the decline in sales of Samsung Corning Precision, a joint venture with Samsung. But clearly the market has overreacted and is behaving as if we are seeing the end of LCD televisions. It is true that this business is 50% of Corning’s revenue and almost all of its profits, but there is a lot of growth in LCD television sales in China and other emerging markets and Corning is a strong player in this business.
Corning is trading at a P/E of 6.15, almost half of its 5 year P/E of 11.6 and the industry P/E of 12. It is trading at less than its book value per share and holds almost $2.50 in cash per share. Its dividend yield is 2.30% and it has been increasing its dividends at 5% over the past five years.
Let’s assume that over the next 5 years Corning will be able to grow its earnings per share at 10% on an annualized basis, almost a fourth of its 5 year historical earnings growth and in-line with analyst consensus estimates. And if Mr. Market changes its mind and decides to grant Corning its historical P/E of 12, the stock will be trading at $36.53, giving a patient investor a five year annualized return of 23%.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.