On November 27, 2012, Corning (NYSE: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.