Corning's Lead in Fiber Optics

As we begin to learn about the leading companies in the optical networking industry as one part of our new study for a high-growth investment, it's only natural to focus first on the building block of optical networks themselves -- fiber.

The market for fiber-optic components is skyrocketing as the thirst for bandwidth remains unquenched. At the end of 1999, Internet traffic was measured in the range of 350,000 terabytes (a terabyte equals one-trillion bytes) per month. By 2003, traffic is expected to reach 15 million terabytes monthly, representing more than 4,000% growth in three years. Add voice and video to the mix and a lot of fiber will need to be in place in the coming years to meet demand.

The fiber pioneer
The first commercial optical fiber was invented in 1970 by former old-line housewares company Corning Inc. (NYSE: GLW). A company on our new high-growth study list, Corning is a technology-based conglomerate that now focuses on three main segments: Telecommunications, Advanced Materials, and Information Display.

The Telecommunications Division has benefited recently from the eagerness of telecommunications carriers to ramp-up "line" capacity to offer services beyond standard voice traffic over telephone. Corning provides the optical fiber and cable, as well as photonic components, that boosts the amount of data fibers can carry -- a necessary factor in boosting network capacity.

The company's Advanced Materials segment manufactures specialized products utilizing glass, glass ceramic, and polymer technologies. These products range from emissions controls in automobiles to lenses for semiconductor equipment.

Finally, the Information Display division manufactures glass panels and funnels for televisions, monitors, and liquid crystal displays. The common ground in each of the three segments is the company's development and utilization of products composed of advanced materials.

Corning's foresight
Corning is the beneficiary of its own foresight and strategic actions. In 1998, signs of weakness in the Asian market and pricing pressures for optical fibers cast a feeling of doom on this fiber-optic trailblazer. However, rather than cutting back on spending in an effort to quell earnings concerns, Corning turned its focus toward the future by significantly increasing its research and development (R&D) budget. Soon after that, the company disposed of its consumer dishware division (Pyrex, Revere Ware, Corning Ware -- all that simple glassware) and instead devoted its resources to new, much-higher-growth areas.

Toward the end of 1998, earnings began to rebound as demand for fiber picked up. As 1999 rolled by, quarter after quarter of exceptional sales and earnings were recorded. Investors took notice and shares soared to new highs. Corning took advantage of its new capital and buying power by acquiring companies in key complementary industries. Late last year, Corning purchased Oak Industries to boost its telecom equipment business. Oak's Laserton Inc. subsidiary will allow Corning to expand its photonics business into active fiber-optic devices for the telecommunications industry and double its capacity for optical amplifiers.

Earlier this year, Corning added NetOptix, which makes filters used in dense wavelength division multiplexing (DWDM) components, and also acquired Siemens AG's (Nasdaq: SMAWY) optical hardware and cable business. Although an attempt to improve manufacturing efficiencies by acquiring Nortel Networks' (NYSE: NT) optical components division fell short, its relationship with Nortel remains strong. By backing out of the deal, Corning also proved its responsibility to shareholders by not taking on an acquisition that would have diluted earnings.

Looking ahead with the industry leader
There doesn't appear to be any signs of slowing in the optical networking industry, and Corning is poised to take advantage of the situation. The market for fiber-optic components is expected to reach $20 billion over the next three years, more than tripling the $6.6 billion figure amassed in 1999. The fiber-hungry telecommunications industry has very few doors to knock on for its raw fiber needs, lending significant leverage to Corning as the industry leader.

Corning isn't ready to relinquish its lead, either. Not only has the company completed the acquisition of four optical networking companies in the past year and nearly went ahead with a mega deal with Nortel, but it also has vastly improved its manufacturing capacity for optical fiber production. It is likely to continue its quest to distance itself from the pack by acquiring more innovative young companies in an attempt to maintain the lead in cutting-edge technology and resources.

This year, Corning is expected to earn $3.25 per share on a pro forma, or apples-to-apples comparison basis (which will exclude amortization of purchased intangibles and goodwill, purchased in-process research and development, onetime acquisition costs, discontinued operations, and other nonrecurring items). This would mean earnings growth of 71% in 2000 over last year. It is expected to earn $3.97 in 2001, up nearly 25%, and it has a 27.4% long-term estimated growth rate. Corning has come a long way from clear-glass frying pans.

As our high-growth study and our fiber study continues, we'll have more to say. To discuss Corning right now, visit us on the Drip Companies board.

Drip on, Fools!

-- Vince Hanks, TMF Elwood on the Fool discussion boards

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