On Dec. 19, 2011, we began purchasing shares of Corning (GLW) for investor accounts; these purchases were made at an average price of $12.73 per share. Unfortunately, we didn't have time to write an article explaining all of the reasons why we felt Corning represented a good value for investors. We did, however, mention the purchases in our Feb. 1, 2012, article "The Prime Minister's 'One Dollar' Bets" when we published our correspondence, saying:
...haven't always been able to publish all ideas (but always execute for friends and family) -- for example, haven't had time to write an article on it yet, but have also been buying GLW (mostly below $13).
Corning released its first-quarter 2012 results this morning, and the company -- as expected -- continues to be quite healthy and the shares undervalued. One of the primary reasons we purchased the shares just over four months ago was because of the growth in Corning's other business segments, which the market appeared to be overlooking given the decline in the display technologies business, its largest single segment. However, the display business is not larger than the other segments combined, all of which are still growing at a healthy pace.
Nonetheless, on a positive note the company did indicate that the rate of decline in the display segment should now slow, with CFO James B. Flaws commenting:
After two successive quarters of significant LCD glass price declines, we expect our price declines will be much more moderate this quarter…
The market responded in the pre-market session by driving the shares up as high as $14.40. What we still can't understand is the market's singular focus on this one business segment, especially in light of substantial acquisitions the company is making in its other businesses. For instance, there's the purchase of the majority of assets of the BD (Becton, Dickinson and Co.) Biosciences Discovery Labware unit for approximately $730 million to add to Corning's life sciences segment, which is already growing 8% quarter over quarter.
Here are the numbers to illustrate our point:
Rev. (in Millions)
Total/Avg. of other segments*:
*Dow Corning Corp.'s equity earnings are not included in this calculation because of the extraordinary gain in Q4, which distorts the figures substantially.
As evidenced above, the sum total revenue of the non-display segments actually constitute more revenue for the company. Furthermore, the rate of growth in these segments is about 30% faster than the rate of contraction in display technology, which (according to the company) is now stabilizing.
The contraction in the display technology business obviously could not go on forever (otherwise, it would eventually reach zero). The company had already indicated during its Q4 conference call that it was taking measures to cut costs associated with this segment in order to bring operating expenses in line with the revised revenue guidance.
Given Flaws' comments above, it appears the trend is now reversing. However, this ought not be the primary focus for investors. Instead investors might consider focusing on the other segments' double-digit growth -- including the forecast that specialty materials, the second-largest segment by sales, is "anticipated to grow in the range of 10% to 15%," according to the company.
When the above is coupled with the Becton, Dickinson and Co. (BDX) acquisition, it is not hard to see that by year end, Corning's display technology business will be secondary to the sum of it's other diversified businesses (all of which are growing). Yet the market continues to react to the company as if it were only in the LCD business.
The above were the primary strategic reasons for acquiring the shares. However, those reasons are more than buttressed by the tactical causes as well, such as Corning's incredibly healthy growth in per-share book value between 2006 and 2011 (avg. 25% per annum/dividends). On Dec. 19, 2011, we wrote to investors on the topic, saying in part:
The pearl of great price is to own companies that do such a good job at increasing per-share book value on a consistent basis that they could be held for say 10 years (or conceivably 100 -- e.g. GLW, KO, IBM, etc.) -- there are very few companies out there like that, but the goal is to find them and buy them on a value basis...
We think the shares continue to be undervalued, even at the pre-market prices today. The company is extremely well established, well run, and has a share buyback program that, although not specifically mentioned in today's report, appears to have taken back an additional 6 million shares in Q1.
The intrinsic value of Corning as a whole is probably somewhere in the $28 range. The average performance (including dividends) for the 4.2 months the shares were owned for the subject accounts annualizes to approximately 37.6%.