By Paul Larson (TMF Parlay)
May 11, 2000

Corning Inc.

Ticker: (NYSE: GLW)
Phone: 607-974-9000
Website: www.corning.com
Price (5/10/2000): $172 3/4

How Did It Double?

One of the hottest sectors on Wall Street these days is the optical networking industry. We've highlighted a handful of optical hardware companies in this column in the past, with JDS Uniphase (Nasdaq: JDSU) being an example of a recent beneficiary of increased investor interest in fiber optics. Today's Daily Double features Corning, a company from which a vast majority of the optical networking companies buy their raw materials (read: fiber).

Corning has made some smart moves to maximize its profit opportunities from the fiber optic boom. The company has not only dramatically increased its manufacturing capacity for the optical fiber it produces, but it has also been more than willing to purchase other optical equipment suppliers to solidify its technological lead. It has gone a long way towards shaking its reputation as a stodgy old conglomerate and is now acting like a cagey growth company by focusing its energy on its fastest expanding markets.

Investors have taken notice. This time last year, Corning was trading just above $50 a share. Just a few weeks ago, the stock made a new all-time high above $200. Even though the shares have sold off in recent weeks with the rest of the formerly high-flying technology sector, most long-term shareholders are sitting on a pretty solid double.

Business Description

Based in the appropriately named town of Corning, New York, Corning Inc. is a diversified, technology-based conglomerate. The company makes everything from fiber optic equipment to glass for televisions. The common denominator in all of its products is that it researches and then produces products using advanced materials.

Corning was founded in 1851 and has gone through numerous mutations over the past 150 years. The latest change in focus finds the company putting its resources towards the fast-growing fiber optic market. Beyond increasing its research and manufacturing output of the raw materials needed for optical fiber, Corning should soon be closing a $2 billion acquisition of NetOptix (Nasdaq: OPTX), a company that makes optical filters for networking hardware.

Financial Facts

Income Statement
12-month sales: $5,187.2 million
12-month income: $500.2 million*
12-month EPS: $1.89*
Profit Margin: 9.6%
Market Cap: $47,903.6 million
(*Includes non-recurring items)

Balance Sheet
Cash: $1,313.1 million
Current Assets: $3,500.6 million
Current Liabilities: $1,265.0 million
Long-term Debt: $1,987.8 million

Ratios
Price-to-earnings: 91.4
Price-to-sales: 9.2

How Could You Have Found This Double?

One way to have perhaps found Corning before it doubled was to simply look at the company's positioning within its industry. It's been fairly obvious for some time now that optical was going to be "the next big thing" in the networking world, and it was also plain to see that Corning, the leading producer of fiber (and inventor of the technology), would see an uptick in this important part of its business. Corning isn't just a "picks and shovels" company for the optical networking goldrush. Rather, it is further up the chain and is also supplying the raw materials needed to make the picks and shovels themselves.

That Corning was seeing an increase in demand for its products was also evident in the company's financial statements. For the past consecutive seven quarters, Corning has seen sales higher than the same quarter in the previous year. In the first quarter alone, Corning's sales jumped 53% over 1999's first quarter. This is no small increase for a company of Corning's size and maturity.

Corning's restructurings over the years also seem to finally be bearing financial fruit. The headcount at Corning has been sliced by almost two-thirds over the past six years, yet Corning is on track this year to have sales greater than any previous year in its history. By ridding itself of some of its more mature businesses, such as its consumer dishware line, Corning has successfully transformed itself into a leaner and more efficient company focused on growth.

Where to From Here?

There's one thing for certain with Corning, and that is that the demand for its optical equipment doesn't look to slow any time soon. The optical networking industry is quite simply one of today's fastest growing sectors. Several companies have stated that they believe that the sales of optical networking hardware is set to triple over the next three years, creating a market opportunity north of $20 billion. Whatever way you slice it, networking companies are scooping up fiber equipment in record numbers, and Corning has positioned itself extremely well to supply the raw materials for the boom.

It's also a fairly safe bet that Corning will continue its hunt for other optical networking companies. Over the past year, Corning has purchased no fewer than four outside companies and has also brought two former joint ventures completely into the Corning fold. The company is clearly attempting to extend its lead in optics, and purchasing up-and-coming firms with promising technology is a modus operandi numerous successful firms have used to keep atop their fields.

So what does this all mean to the bottom line? Corning is expected to earn $2.75 per share this year and $3.37 in 2001. That means that Corning is trading at roughly 50 times earnings two years out, which is still rich compared to the rest of the market but a bargain in the world of optical networking companies. Either way, Corning is no longer a lumbering conglomerate and is a company growth-oriented investors should probably keep on the radar.

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