Corning: Recent Fiber-Optic Acquisition Will Drive Transformation/Shareholder Rewards

| About: Corning Inc. (GLW)
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The company has established a pattern of acquisitions to strengthen each of its divisions while also lessening its reliance on its price-sensitive LCD glass business.

The company’s diminished reliance on its profitable but price challenged LCD glass business would benefit the entire company’s results and shareholders as well.

The company’s STRAN Technologies acquisition allows it to enter the harsh environment/tactical interconnect products/services market serving the military/aerospace and oil/gas industries.

The company’s STRAN acquisition also improves its product/technology portfolio by strengthening its ability to deliver new integrated solutions to network operator customers.

With significant share-repurchases likely to wind down, the company’s acquisition activity will take center stage to transform it towards more consistent revenue/earnings growth.

Our primary theme for Corning (NYSE:GLW) as an investment has been a theme of transformation towards balancing revenue/earnings across all of its divisions more evenly and lessening dependence on the company's price sensitive LCD glass business. We were not completely surprised when GLW made its latest acquisition announcement in late December 2016. In particular, the company announced that it acquired (with terms not disclosed) full ownership of STRAN Technologies ("STRAN"), a U.S.-based producer of harsh environment and tactical interconnect products and services that serves the military/aerospace and oil/gas industries. STRAN, an OEM designer/manufacturer of rugged fiber-optic and hybrid fiber/power connectivity solutions, offers products that qualify for specific use in mission-critical infrastructure projects. STRAN also provides engineering, installation, and maintenance services along with design and manufacturing expertise that gives GLW access to a new customer base.

GLW's acquisition of STRAN improves its access to military, aerospace and oil and gas markets through the addition of harsh environment optical and power connectors and cable assemblies. The acquisition also improves the company's innovative product and technology portfolios by strengthening its ability to deliver new integrated solutions to network operator customers around the world. To us, GLW's acquisition makes sense as the company's optical communications division has been outperforming other divisions of late. In addition, we see GLW's legendary research and development capabilities as enabling it to expand and grow revenue/earnings from STRAN's product and service offerings more than if STRAN remained a stand-alone company.

Further, GLW's recent effort to rapidly increase its patent portfolio will prove useful to ramp up patent protection for STRAN's products and protect the valued-added aspects of its products. Ultimately, as we pointed at the outset of this article, GLW's acquisition of STRAN continues to lessen the company's dependence on its LCD-glass business. In recent years, we have observed GLW making two to three acquisitions a year. Over the near to intermediate term, we see the company continuing this pattern until the company can drive more consistent revenue/earnings growth. With this in mind, we believe that investors should consider purchasing GLW's shares on any 5 to 10 percent pullback in the company's shares to fully benefit from the company's transformative acquisitions.

GLW's ongoing transformative acquisitions are only one piece of the puzzle in the story of the company's actions that are likely to drive its shares higher sooner rather than later. The second piece of the puzzle is the shareholder returns portion of the company's plan to drive its shares higher. In our recent article, we pointed out that GLW's significant share repurchases have reduced its outstanding share count from 1.5 billion shares outstanding several years ago to about 950 million in late 2016. We noted further that GLW announced an share buyback in December 2016 of $4 billion.

At the time of GLW's latest share purchase announcement, the company referenced its October 2015 Strategy and Capital Allocation Framework designed to create significant value for shareholders by leveraging its financial strength and focusing its product portfolio. The company then noted that it had later updated such Framework to include a commitment to deliver greater than $12.5 billion to shareholders while investing $10 billion to sustain and grow its leadership positions. With GLW's shares standing fractionally below a 52-week high, it is clear to us that investors are appreciating GLW's recent efforts to reward shareholders and drive more consistent revenue/earnings growth through a focused product portfolio and acquisitions that enhance such product portfolio.

While GLW's shares stand near 52-week highs, we do not believe that potential investors are too late to take part in the shareholder rewards that will result from the company's transformative actions. While we believe the company will continue share buybacks in the intermediate and long term, the most significant GLW buyback activity is likely in the rear view mirror. As evidenced by the STRAN acquisition noted above, GLW is now more likely to continue additional bolt-on acquisitions and other structural changes to drive more consistent revenue/earnings growth in the intermediate and long term. (We have previously noted in our articles that the company had become more involved in transformative actions in recent years.)

GLW also continues to engage in research and development to offer an increasing number of innovative products. With GLW increasing its product offerings at a more rapid rate, we believe such product offerings and the announcement of additional acquisitions in 2017 will drive the company's shares to levels not seen in over a decade. Finally, the wild card that will also benefit shareholders is GLW's likely shareholder friendly use of the President Trump induced repatriated overseas cash at an advantageous tax rate.

Our view

After the company completes its latest share repurchase program, GLW's outstanding share count will have been reduced by about 50 percent in the last several years. As the company's share-repurchase program winds down, however, it is GLW's acquisition activity that will take center stage as it continues its transformation towards being a company with more consistent revenue/earnings growth. The components of such transformation activities include internal research and development, capital spending, product innovation, acquisitions and divestitures.

With respect to the technologies the company will focus its efforts on, GLW will remain strategically focused on technology markets where it is a market leader and which will allow it to generate significant growth and returns for investors. As GLW's transformative activities continue, we view such activities as strengthening each of the company's businesses through internal innovation and acquisitions to drive long-term revenue and earnings growth. We believe that such innovation and acquisitions are critical to GLW not being overexposed to its price-sensitive LCD glass business.

While we would not be completely uncomfortable with investors purchasing GLW's shares now, we see potential investors having the opportunity to purchase the company's shares on a 5 to 10 percent pullback on any overall market sell-off. Trying to time a value-oriented purchase of GLW's shares may prove difficult given the company's ongoing substantial share buyback activities. (We should note that some analysts, while positive on GLW's transformative efforts, believe that investors should wait for a slight pull back before purchasing the company's shares. (Subscription required to access linked article))

GLW's forward price-to-earnings ratio is about 16.60 based on 2016 earnings estimates of $1.49 and 14.90 based on 2017 earnings estimates of $1.66. We believe that long-term focused investors should consider purchasing GLW shares on any overall market selloff as time is likely running out before such shares break out to the upside. Long term, GLW's innovative research and development abilities, aggressive acquisition strategy, capital-allocation plan and potential use of repatriated overseas cash will reward investors with dividend increases, share buybacks and share price appreciation.

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Disclosure: I am/we are long GLW.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Hello, I made some changes tot he first sentence and shortened paragraphs. Please publish ASAP if possible since article is time sensitive. Please note I am not a chart person as I haver written almost 300 articles and do not use them. Thank you.