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Michael Fu
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Value investor. 12+ years in corporate finance and i-banking. MBA from Kellogg School of Management, BBA from University of Michigan, and CFA charter holder.
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  • Corning (GLW): Recent 4Q12 Forecast Boost A Sign To Buy?

    On November 27, 2012, Corning (GLW) announced that Gorilla Glass could achieve $1 billion in sales in 2012 (or 13% of total sales of $8 billion). The Company also noted some positives in the LCD display business (40% of total sales), indicating LCD volume should be up mid-single digits in Q4 2012 (to offset LCD price decline) and that LCD price declines will be moderate in the Q1 2012.

    Investment Thesis: GLW represents a unique way to invest in both Samsung and Apple smart phone success (through Gorilla Glass sales), as well as to invest in the cyclical turnaround in the LCD display market (40% of total sales). Additionally, GLW provides some exposure to China's rising middle class market, through the Samsung Corning JV's investment of a $600mm LCD facility in China, scheduled to be completed at end of 2013. China's LCD TV market is currently 20% of the world market.

    Valuation: At a stock price of $12.20, GLW trades at 9x 2013 P/E, the bottom range of 10 year historical average of 8-14x P/E. The Company also has $3 billion of net cash ($6.4bn cash - $3.4bn debt), or about $2.00 per share of cash. The dividend yield is 2.62%, and the company recently raised dividends by 20% in October 2012 (typically a strong indicator by mgmt of confidence in their future business). Price to Book Value is 0.8x, also typically a value indicator.

    Revenue Segments: 2012 total revenue is approximately $8 billion. LCD Display for TVs, notebooks, desktops is 40% of sales, Telecom 25%, Specialty/Gorilla Glass 13%, Auto 13%, and Life Sciences 8%.

    Margins: Gross Margin (45%), Operating Income (20%), Net Income (35%, due to equity earnings from Samsung JV). Specific gross margins by revenue segment: LCD display (40%), Telecom (10%), Specialty/Gorilla Glass (-4%), Auto (12%), Life Sciences (10%). As Gorilla Glass business scales, gross margins in that segment should improve to positive margins with operational leverage/capacity utilization.

    Samsung JV: Samsung Corning is a JV between Corning and Samsung for making LCD displays. 2 customers (Samsung and LG Display) account for 93% of the JV's total revenue. The JV is building a $600mm facility in China scheduled for completion at year end 2013. China's LCD TV market is currently 20% of the world market.

    Conclusion: LCD display market is a commoditized, cyclical industry that has experienced price declines in the past 2 years, (partially offset by positive volume increases. However, Corning's recent Q4 commentary and dividend increase seem to indicate the industry may be finally turning a corner. Corning's specialty glass (gorilla glass and willow glass) has been a tremendous innovation, that has allowed Corning to participate with Apple and Samsung in enjoying the high growth of the latest trend in consumer products (smartphones, tablets, mobile devices). The reasonable valuation of 9x P/E, 0.8x P/B, and 2.6% dividend yield, provide a floor/downside protection, while you wait for the LCD market to turn around and the gorilla glass segment to fully scale.

    Disclosure: I am long GLW, AAPL.

    Tags: GLW, AAPL
    Nov 29 3:30 AM | Link | 2 Comments
  • Apple: Buy Or Sell?

    Apple's recent earnings miss. Apple vs. Samsung lawsuit. iPhone 5 rumors. cheap valuation (10-12x P/E). $115 billion cash balance. $600 per share and $550 billion market cap, the largest market cap company. Is Apple a Buy or Sell? Let's look through the facts:

    Valuation (at a stock price of $600): market cap ($565 billion), 2012 sales ($150 billion, 3x sales multiple), 2012 EPS ($50.00, 12x P/E multiple), cash ($118 billion, or 21% of market cap, or $125 cash per share), no debt

    Dividends/Stock Buybacks: $10.60 annual dividend recently initiated with first shareholder record date of August 13, 2012 (1.8% dividend yield, 20% dividend payout ratio), $10 billion stock buyback authorized (approx. 10% of cash balance)

    Market Share: Mobile Worldwide (12.5% Samsung, 7% Apple), Mobile U.S. Only (Samsung 26%, Apple 14%), P.C. Worldwide (6% Apple), P.C. U.S. Only (11%)

    Business Segments: iPhone (38% of sales), P.C. (28% of sales), iPad (12% of sales), Others including iPod, iTunes, Software, Peripheral (20% of sales)

    Growth and Margins: Revenue growth of 15-20% (2Q2012 Revenue grew 23% year on year). Gross Profit Margin (40%) and Net Profit Margin (25%)

    Risks: Sales, profits and overall success of Apple heavily depends on the success of the next iPhone 5 (rumored to announce on September 12, 2012). iPhone currently comprises 40% of sales and 60% of profits.

    Conclusion: Apple looks like a Buy in my opinion. It is very rare to find a company/stock that has 40% gross margins and 25% net margins, with revenue growth of 15-20%, that currently trades at only 10-12x forward P/E. Add to that, the 1.8% dividend yield and $125 cash per share , and you've got a once-in-a-lifetime value stock (no wonder David Einhorn of Greenlight Capital is long Apple).

    Target Price: A stock with 15-20% sales growth typically would trade closer to 15-20x P/E as a fair valuation. Note some growth stocks trade at P/E multiples up to 2x sales/eps growth, but let's not get greedy. At $50 EPS per share, a fair 15-20x P/E valuation would imply a target stock price of $750 to $1,000 per share (25-65% upside).

    But as highlighted above, the product risk of the success of the next iPhone 5 is a real concern. Given iPhone comprises 40% of sales and 60% of profits, a mis-step on the next iPhone model could be very costly to Apple shareholders.

    Risk Mitigation: One way to mitigate that risk would be to purchase insurance: Buy Nov 2012 put options at say strike price of $500, to limit your downside to only 15-18%, in that very unlikely scenario that iPhone 5 is a total miss with consumers. The put would only cost you $7 / share, or about 1.2% the cost of an Apple stock ($600 / share).

    Disclosure: I am long AAPL.

    Aug 02 7:10 AM | Link | Comment!
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