At the Fiber-to-the-Home Conference on Sept. 30 - Oct. 3, Corning (NYSE:GLW) is set to introduce its full suite of optical fiber, cable and hardware and equipment solutions based on its nanoStructures technology platform. On July 23rd, Corning announced the gigantic breakthrough in fiber optic technology- optical fiber cables based on nanoStructures technology that allows cabled fiber to be bent around very tight corners with virtually no signal loss.
Optical fiber is superior in all aspects to traditional copper cables in transmitting everything from broadband internet, TV, and digital telephone- all aspects except maintaining the quality of the signal in bends, twists, and other abusive configurations. The reason is the light used to transmit the signal travels in a straight line. Having not been able to bend optical fiber as you could copper cable, using optical fiber in tight installations such as in apartments were not possible…leaving a large untapped market. It is unclear how Corning’s geniuses figured out how to overcome this old problem handicapping the use of fiber optic cables.
The nanoStructures technology used suggests the glass composing the fiber optics have been engineered to the smallest microscopic detail such that the light transmitting the data always travels in a straight line. This is similar to how a super-closeup of the edge of a circle will look like a straight line.
However it is done, this may be one of the biggest recent breakthroughs in media communications that no one is talking about. All the major telecoms such as Verizon (NYSE:VZ), AT&T (NYSE:T), and Charter Communications (NASDAQ:CHTR) as well as cable operators such as Time Warner Cable (NYSE:TWC) and Comcast (NASDAQ:CMCSA) are fighting to offer the triple play: internet, telephone, and TV. Reliable fiber optic cable that Corning just invented makes the triple play possible and easy. On July 25th, the “Bend it Like Corning” article in Fortune highlights the importance of optical fiber:
what Verizon (VZ) really loves is the material’s ability to transmit 25 trillion bits of data per second; that’s the equivalent of 400 million simultaneous phone calls, or 450 channels of high-definition television. (That’s about 3.6 million times the capacity of Verizon’s copper phone lines, which can deliver seven million bits per second, tops.) And so Verizon, which wants to sell not just phone service but lightning-fast Internet connections and TV as well, is spending $23 billion to deploy 80,000 miles of fiber directly to as many as 18 million customers’ homes.
Let me highlight that again: 3.6 MILLION times the capacity of Verizon’s copper phone lines!
Before you get too carried away with excitement (as I have), know the initial target market for Corning’s optical fiber is apartments and highrises, the so-called “Multiple Dwelling Units”- not the suburbs. So, the market will be huge no doubt, but we’re not covering the U.S. coast to coast with these fibers just yet. Corning is working with Verizon to develop tools and methods for installing these fibers in multiple dwelling units. That being said, the long term potential for these new optical fiber is it could become the new standard and replace old copper cables across most of the U.S. and across the globe- making Corning a domestic infrastructure play (replacing old communication cables) as well as a Rest of World growth play. For those who don’t get out of the U.S. much, much of the growth regions such as Europe and Asia have more apartment complexes and high-rises than suburbs. Single family homes don’t exist across much of Asia, including China. People live in cities and towns that are all closely packed buildings anywhere from a 4-story single family home to apartment complexes 30 stories or higher housing thousands of families in each complex. Corning has a strong presence in Asia, with its close ties with companies such as Korea’s Samsung (Corning owns 50% of Samsung Corning Precision) and I believe Corning will attack this market, installing Corning’s fiber in building after building popping up all over China. Corning’s expansion of its Optical Fiber Manufacturing facility in China speaks to that strategy.
The one possible competitor to this technology might be longer-range wireless such as WiMax. However, wireless still has many problems to overcome for just internet usage before we even consider using wireless for the triple play. Problems such as signal strength, distance, as well as interference between rooms and during severe weather conditions makes hard line wire connections more reliable. Wireless will work great as a local hub within the apartment or floor, the so-called “last mile.” For the rest of the journey, the signal still still travels best on cables and wires.
Given that investors are still eying corning as a LCD panel play, the huge potential of this nanoStructure fiber optic cable hasn’t even begun to be priced into Corning’s stock. While in the nearterm Corning’s earnings and price action will key off the traditional LCD panel (which should do well this holiday season given optimism about inventory control), this new fiber optic cable could provide steady accelerating growth for Corning in the coming years. This will give Corning’s earnings and stock more consistency as the more stable fiber cable business decouples the stock price from LCD panel seasonality. Corning’s LCD business, the Displays Technology segment, accounts for 38% of sales. However, the Telecommunications Segment that produces the optical fiber cables is not far behind with 35% of sales in 2006. If Corning successfully executes its strategy to get major telecom companies to switch to these optical fibers, as well as upsell to these companies the accompanying hardware and accessories, look for the Telecommuications Segment to account for more sales than the LCD business.
I believe it’s a good time to start picking away at Corning ahead of the Fiber-to-the-home conference at the end of September, especially with the holiday season ahead of us and Corning’s stock usually ramps into the holiday LCD-Big Screen TV season. Having sold off from the $27 level when it reported earnings to the $23 level now, Corning looks pretty safe and too cheap at a PEG of 1.04.