Corning Incorporated (GLW) is a global, technology-based corporation that primarily derives revenue ($7.9B) from five reportable segments: Display Technologies (40%), Telecommunications (26%), Environmental Technologies (13%), Specialty Materials (14%) and Life Sciences (7%). The company manufactures and processes products at approximately 80 plants in 13 countries.
The stock seems to have a lot of upside potential, but also lots of risk, hence the big market discount. Corning has a broad product portfolio and is a big player in LCD displays, Telco, smart phones and tablets, but has a very concentrated base of customers (10 customers = 51% of sales). While demand has been high for display and specialty glass, competition has been increasing and market growth rates have been leveling off resulting in a glut of global supply in some segments. High customer concentration and increasing competition could leave GLW vulnerable to significant risk from the loss of any major customer and might reduce pricing power (and margins).
Still, the company's balance sheet is solid (lots of cash, free cash flow, little debt), it invests heavily in R&D and facilities (CAPEX = 2X depreciation), and likes to return excess cash to shareholders through dividends and buybacks.
Finally, valuation of the firm at historically conservative growth rates suggests that the GLW is trading at a substantial discount to historical ratios and discount rates.
Valuation
Based on a blend of valuation methods (discounted cash flows, dividend discount method and historical and industry price ratios) I arrive at a current valuation for Corning Incorporated of US$19.05.
Risks
Listed below are some of the key risks faced by the company. This list is by no means comprehensive. For a more complete discussion of risk, refer to the company's annual report and 10K filing.
- General Economic Conditions & Demand - Revenues in all segments are sensitive to general market and economic uncertainty. In particular, reduced consumer demand for automobiles and heavy duty trucks, LCD televisions and monitors, notebook computers, fiber-to-the-premises build-out, or in the trend to larger LCD televisions could have significant adverse impacts on revenues and earnings.
- Key Customer Concentration - Sales are highly concentrated amongst a small proportion of Corning's customers and could be negatively impacted by the actions or circumstances of one or more key customers leading to the substantial reduction in orders.
- Competition - Corning faces continuous stiff competition from existing competitors, low cost manufacturers and new entrants that may result in excess global production capacity, lower sales, margins and cash flow.
- Evolving Technology - Corning's continued success depends on the timely introduction of appropriate new products and technologies. Failure to keep up with evolving technologies and effectively incorporate them in new products could materially impact sales.
- Currency Fluctuations - As the company derives revenues globally, but manufactures in select regions, significant fluctuations in exchange rates may adversely affect sales, net income and cash flow.
The Numbers
- Share Price ($US) 12.92
- Market Cap ($US B) 20.0
- No. Shares (M) 1,568
- ROE 8.7%
- ROA 6.6%
- P/E Ratio 8.2
- Price/Sales Ratio 2.6
- Price/Book Ratio 0.9
- Current Ratio 5.5
- Interest Coverage 19.2
- Total Debt/Equity 15.0%
Disclosure - At publication of this analysis I hold a long position in GLW. I do not take short positions in any of the stocks reviewed on this site, nor do I receive any compensation from the companies studied for publication of my opinions.
