|A Glass Act on the Cheap
By SANDRA WARD / Barrons Nov 12, 2011
Corning's wares have become the face of consumer electronics, from TVs to tablets. But its shares have practically dropped from sight. Why they could do smashingly well.
Shattered by falling sales of televisions and personal computers, shares of specialty-glass maker Corning have dropped 20% since the start of the year, and now trade at levels last seen during the height of the worldwide financial crisis in late 2008 and 2009.
Then as now, the makers of flat panels, to which Corning supplies glass, drastically cut back on inventories and reduced production levels at their plants in response to an uncertain economic environment that has hindered consumer spending and hurt pricing. The flat-panel makers are taking their cue from the television makers.
Corning shares (ticker: GLW) performed well through the early part of this year, much as a bullish piece in Barron's last December predicted ("Corning's Winning App for the iPad," Dec. 13, 2010). But euro-zone financial woes, fears of a double-dip recession and the protracted budgetary stalemate in Washington this past summer have undermined business and sent the stock tumbling from a first-quarter high. A revival could now be in order.
About 85% of Corning's profits are tied to the display glass typically found in TVs and personal computers, as well as smartphones and tablet computers, even though the segment accounts for only 45% of revenue.
The company's other businesses include fiberoptics for telecommunications; emission controls for light-duty, gasoline-powered vehicles and diesel-powered cars and trucks; specialty glass–known as Gorilla glass—that's thin and durable and used for smartphones and tablets, and glassware, such as Pyrex, used both in scientific laboratories and in cookware.
At a recent$15 a share, Corning, the world's leading maker of specialty glass, carries a stunningly low price/earnings multiple of 7.9 times 2012 estimated earnings of $1.89 a share. The share price is only slightly higher than the company's book value of $13.79 a share.
That's quite a comedown for a company that posted $2.1 billion in sales in the third quarter, a 30% increase from the year-earlier period, with all segments posting double-digit percentage growth. Gross margin expanded to about 47% from 44.3%, and Corning beat earnings expectations for the period by posting net income of $811 million, or 48 cents a share, excluding special items. Analysts had been expecting earnings of 42 cents a share, down from year-ago profits of $785 million, or 51 cents a share.
Gorilla on the Loose
Corning's thin, light and durable Gorilla glass is playing a key role in the smartphone revolution. So why is its stock at the lowest level since the financial crisis?
Recent Price $15.00
Mkt Value (bil) $24
EPS 2012E $1.89
PE 2012E 7.9
EPS Growth '11 vs '12 2.7%
Source: Thomson Reuters
At the time results were released, Corning Chairman and Chief Executive Wendell Weeks asserted the company is "well-positioned" to reach its goal of $10 billion in sales "within the next several years." Also, Chief Financial Officer Jim Flaws predicted retail demand would rise next year, "potentially in the double-digit range again." With inventories at historic lows, higher demand from consumers would set the stage for stronger order demand for glass.
Signalling its optimism about Corning's prospects, the company's board of directors recently approved hiking the annual dividend by 50%, to 30 cents a year, from 20 cents, which brings the dividend yield to more than 2%. It also authorized a stock buyback plan of up to $1.5 billion in shares through 2013, with purchases beginning in the current quarter.
Corning can well afford to give a little extra to shareholders: The company has $4 billion in net cash on its balance sheet, and expects to be generating $7 billion in free cash flow by 2014, up from $2.8 billion last year.
"We believe our future free-cash-flow prospects are excellent, driven by business performance and lower capital spending starting in 2012, as some major projects are finished," CEO Weeks said in announcing the action to enhance shareholder returns. "In our opinion, the company's current stock price represents a significant discount to the real value of Corning's businesses."
THE BOARD'S MOVES HAVE SUPPORTED shares of Corning, whose market value is $24 billion. The stock is up 15% since Oct. 5, when the board actions were announced.
Board member John A. Canning Jr., a managing director and co-founder of Chicago-based private-equity firm Madison Dearborn Partners, gave his endorsement to the stock when he bought 30,000 shares in late October for a total of $462,000, or an average price of $15.40 a piece. In August, CFO Flaws ponied up more than $1 million to buy 65,000 shares at an average of $13.49 each, and another 10,000 at about $13.77 a share.
Corning posted $2.1 billion in sales in the third quarter, a 30% increase from a year earlier; all segments had double-digit percentage growth.
"It's very attractive," analyst Darice Liu of Brigantine Advisors says of Corning's stock, noting that long-term fundamentals are strong and the valuation is compelling. She sees the shares possibly hitting 18 in the next year, a gain of nearly 20% from current levels.
"The supply chain is so tight, that when panel makers pull the trigger and increase utilization and productivity, you'll see an immediate positive impact," says Liu.
Corning was the only stock added in the third quarter to the $5 billion Oakmark Fund, which is dedicated to investing in large-cap companies that are trading at discounts to their intrinsic value; the fund is managed by longtime value investor William Nygren. He bought Corning stock at $13 a share, below book value and at less than seven times earnings.
Nygren points out that in 2000, at the height of the technology, telecommunications and media boom, Corning earned $1.23 a share on the strength of its fiberoptics business, and its stock traded at 113.
That was one extreme, but now the shares have swung too far in the other direction. Last year, driven by a boom for LDC TVs in Japan and China, Corning earned more than $2 a share. It is expected to earn $1.84 a share this year.
NEAR-TERM PRICING PRESSURES in the glass-panel market are weighing on the shares. Corning expects to lower prices this quarter to a greater extent than it has in previous quarters, as a response to excess capacity and to maintain market share. By the end of the fourth quarter, however, the company expects inventory levels in its end-markets to fall below 14 weeks' worth of supply, down from the 17 weeks early in the third-quarter.
The Bottom Line
With inventory levels low now, TV makers will quickly need lots of glass when consumer demand picks up. That could lift Corning's stock by 20% or more.
The television market is the most critical segment for Corning, because of the high square-footage of glass required and the numbers of televisions sold.
With the approach of the holiday season, which now extends well into the first quarter to include Chinese New Year, in addition to the Christmas and Hanukkah celebrations in the fourth quarter, prices for liquid-crystal display (LCD) panels are showing signs of stabilizing after declining steadily since July. That's according to Display Search, a global market-research and consulting firm that's part of NPD Group, a retail-trend tracker. Prices in November were flat with October's.
"The indications are that there will be pretty aggressive pricing for the holidays, and that could drive volume and be a positive for industry growth," said Paul Semenza, senior vice president at Display Search. "The risk is [inventories] are too lean. If demand spikes, inventories wouldn't be adequate." That's a risk Corning investors might happily take.