1 Stock Tom Gardner Thinks You Should Watch

The demand for LCD televisions has stalled. The price of glass is falling thanks to an oversupply in the market. Gorilla Glass is a goofy name for a product. Motley Fool co-founder Tom Gardner has heard all the complaints about Corning (NYSE: GLW  ) , the world leader in specialty glass and ceramics, and the market has priced the critiques into its shares.

But while there might be headwinds at the moment for some of its products, those who discount Corning based on the monthly sales of its latest new thing are missing the story of this venerable company. Sure, management warned not long ago that major LCD television players such as AU Optronics (NYSE: AUO  ) and Sony (NYSE: SNE  ) would soon be buying less of its glass at a lower price. And yes, its critical display business (the glass used to build LCD TV sets) declined 5% year-over-year in the third quarter, although sales in the segment rebounded in its most recent earnings report.

But more importantly, Tom and his team at Stock Advisor view Corning as an R&D machine.

Much more than LCD
The company is constantly pumping profits into research and development, essentially creating new industries along the way. When Corning engineers made the glass for Edison's first light bulb, they weren't necessarily thinking about large-screen television sets. And when the company started making large-screen TV sets, it wasn't necessarily thinking about changing the composition of that glass in order to make it more durable and scratch-resistant (the aforementioned Gorilla Glass) for handheld devices.

In fact, according to one (possibly mythical) story reported on the blog of a New York Times technology writer, Corning invented a cousin of Gorilla Glass in the 1960s but didn't know what to do with it. The story goes that someone eventually showed a piece of it to Steve Jobs, who immediately thought of incorporating it into all sorts of Apple (Nasdaq: AAPL  ) products that might need to be scratch-resistant.

Stories aside, innovation is hard-coded into Corning to the point that it is an ever-changing company. From generation to generation, from decade to decade, it's a constantly evolving entity so that it could well be a different company in 10 years than what you might buy today. Corning constantly has an eye toward the next wave and adapts to capitalize on the industries that others can't yet envision.

As CEO Wendell Weeks told the Fool in a 2005 interview:

Corning has never been an easy company to categorize. Even during the explosive growth of our telecommunications business in the late 1990s, we were about more than communications equipment. While display is our fastest-growing and most significant segment today, we are not narrowly defined as a TV parts supplier.

Simply put, Corning is a diversified technology company with a unique history of innovation. We combine our materials and process expertise to solve difficult systems problems for customers. We develop unique products -- keystone components -- that enable new complex systems. We don't play in one market or industry. We invent technologies such as optical fiber, which revolutionized telecommunications networks. We invented and perfected the glass-fusion manufacturing process that enabled our leading position in the production of liquid crystal display glass substrates for desktop monitors, laptop computers, PDAs, and now, flat-screen televisions. We invented the ceramic substrate that is the centerpiece of emissions control systems on gasoline-powered automobiles and diesel engines, and we are heavily involved in the life sciences field. So, Corning doesn't fit neatly into Wall Street's industry categories.

Missing the big picture
Analysts who downgrade Corning and investors who sell their shares based on the latest quarter or the success or failure of a particular product line are a benefit for long-term investors. Adoption of Gorilla Glass is heating up. According to an article in Toronto's Globe and Mail, Corning was the big winner at this year's Consumer Electronics Show after Microsoft (Nasdaq: MSFT  ) announced during its keynote presentation that the newest version of table-sized Surface multitouch business computer would use Gorilla Glass. That decision was followed in short order by similar word from Motorola Mobility (NYSE: MMI  ) , Samsung, and Sony for their tablets, smartphones, and TVs. Corning's CFO thinks Gorilla Glass could bring as much as $1 billion in annual revenue.

That's great. But a decade down the road, the primary driver could well be within its environmental technologies division. Corning's ceramic substrates and diesel particulate filters are integral in pollution control systems, which could become more important as we look for green solutions. But to try to pinpoint the exact area that will be driving Corning's success is a difficult -- and ultimately unnecessary -- challenge.

As Weeks said, "We are committed to spending about 10% of our total revenues on research, development, and engineering. We must invest in the future in order to grow through global innovation and create a sustainable stream of earnings from new products and processes."

What to watch
Tom's not ready to commit to a formal recommendation of Corning, but he feels it's definitely worth adding to your watchlist. But what should you watch for?

First, TV sales are cyclical, a condition exacerbated by a recession when people are more concerned with paying the mortgage than getting the latest flat-screen TV. As the market reacts to that cyclical nature, it might offer cheaper buying opportunities for investors.

Second, watch where else Corning's glass and ceramics are showing up. It might give us a sense of where Corning is placing its biggest bets for the future and will provide insight into the market opportunity that awaits.

Want two more companies that Tom thinks you should watch, plus three that his brother and fellow Fool co-founder, David, believes you should keep an eye on? Once you create your personalized version of My Watchlist, you'll have immediate access to our free report "Six Stocks to Watch From David and Tom Gardner." It's waiting for you when you begin building your own watchlist. Click here to get started now.

Roger Friedman owns none of the companies mentioned above, but he's definitely watching Corning. The Fool has written puts on Apple, which is a Motley Fool Stock Advisor selection. Motley Fool Options has recommended a diagonal call position on Microsoft, which is a Motley Fool Inside Value choice. The Fool owns shares of Microsoft and Apple. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (13) | Recommend This Article (78)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 10, 2011, at 7:32 PM, Merton123 wrote:

    Very interesting article. GLW is a large cap stock of 35 billion. Glass to my untrained eye appears to be a commodity like salt, pencils, and possible computer chips. What are the barriers of entry for the competitors to duplicate whatever GLW comes up with? How can GLW take advantage of the emerging markets? The NYSE may be merged with German stock market. The growth opportunities are overseas in my opinion.

  • Report this Comment On February 10, 2011, at 7:59 PM, stan8331 wrote:

    I have to admit I hadn't paid enough attention to Corning, didn't realize it had such a track record of innovation. It may have further to fall before the stock heads back north but with the clean balance sheet and an incipient dividend with a ton of room to rise, I don't see anything not to like about the company. Will be keeping a close eye on GLW.

  • Report this Comment On February 10, 2011, at 9:09 PM, TMFSunshine wrote:

    Merton, I'm just the journalist here, but after digging in, I think that what Corning has is to glass what Coke is to soda. There's a secret recipe that allows it to exceed what other companies can create -- in this case, thin and incredibly strong glass. And if the smartphone makers ask for it by name, there's probably something there. Moreover, as I wrote, we shouldn't get caught up with the latest thing when it comes to this company. It's about processes and innovation. Corning has it.

  • Report this Comment On February 10, 2011, at 9:21 PM, hiddenflem wrote:

    I think it's a very solid take.This company is great at reinventing itself. And the valuation at the moment isn't insane either.

  • Report this Comment On February 11, 2011, at 1:55 AM, Merton123 wrote:

    TMF Sunshine - Thankyou for your followup. When smartphone asks for the product by name Corning has started to develop a moat. Process and Innovation means that Corning will keep one step ahead of the competition.

    Changing topics - I am also impressed with Dupont (DD). They are facing the challenge that their key ingredient for their various chemicals (oil) is becoming more and more expensive. They like Corning (i.e., research and development) are in the process of finding a substitute for oil as the base for their various chemicals. If they are successful in finding a substitute for oil, their P/E ratio could easily surge past 20 without taking a breather.

    What makes the stock market so fascinating is that there are so many different companies and stories out there to be uncovered. Should we invest in Corning, Dupont, or somebody else? I envy the journalists who can spend their time fulltime turning over the different rocks and bring to our attention the various stories relating to the different companies.

  • Report this Comment On February 11, 2011, at 6:15 AM, Stonewashed wrote:

    I have held this stock for quite some time. I have noticed there is somebody playing with its price for a couple of years now, and the fundamentals make no sense as to why the price is so low. Seems like there is some player out there trying to grab the shares for peanuts. I get letters every now and then from others wanting to buy my shares. Which is why this market is so dangerous. Good companies can be brought to their knees.

    As you said the gorilla glass is promising

    http://www.pcmag.com/article2/0,2817,2379519,00.asp

    Then there is this

    recent investments in China, which include a $1.8 billion joint integrated silicone manufacturing site in Zhangjiagang, Jiangsu province, in partnership with Wacker Chemie AG. The new manufacturing site will be China's largest facility of this kind and will include a siloxane plant and a pyrogenic silica plant. Dow Corning has also announced plans to launch a China Business and Technology Center in Shanghai, which will include a state-of-the-art technology and development facility and Dow Corning China corporate offices.

    http://www.azom.com/news.asp?newsID=27700

    One of the only companies in the world able to provide silicon-based solutions throughout the entire photovoltaic value chain, Dow Corning continues to expand its portfolio of total solution packages for solar cell manufacturing, module assembly and installation. Solution packages are built on high-performance silicone products such as encapsulants, adhesives, coatings, potting agents and sealants, as well as next-generation solar grade silicon.

  • Report this Comment On February 11, 2011, at 9:57 AM, aangelis7 wrote:

    I bought in when gorilla glass first was announced, haven't seen a whole lot of movement.

    However, that being said, I love the shatter resistant kitchenware. With Corning, you'd better buy an everyday "china" pattern you like, because it will outlast your lifetime.

  • Report this Comment On February 11, 2011, at 10:32 AM, Merton123 wrote:

    Lets take a look at Corning Competition:

    Nokia (NOK) Large Cap P/E 14.04

    Cisco (CSCO) Large Cap P/E 13.85

    Qualcomm (QCOM) Large Cap P/E 26.20

    LM Ericsson (ERIC) Large Cap P/E 23.48

    Many of these names were highflyers during the 2000 stock market bubble. Cisco is now one of the DOW 30 components I believe?

    80% of the share outstanding of Corning are owned by institutions. Growth Fund of America owns 6% of the shares outstanding. I didn't see any of the traditional value mutual funds (e.g., Tweedy Brown) owning share - very interesting. Vanguard Total Stock Market index ownes this stock. This company is not a member of the S&P 500 index.

    Right now the corporate officers Wendell P Week is selling 486,095 shares per Yahoo Finance insider screen.

    This is a large cap stock which is followed by various stock analyst. None of the traditional Value Mutual own this stock. Why does the stock market consensus believes that this business will have little earning growth and may be on the decline? The next step is to read value line and morningstar analysis of the company to find out what is the challenge confronting Corning. I would also suggest contacting investor relations department of Corning and requesting their latest financial statements and read the financial footnotes and take a hard look at the cash flow statement to see where the cash is going.

    The large cap universe is very efficient because so many institional investors research these companies. This could be a value play depending on identifying the reasons why the institional investors have such a low regard for this company. The professional value investors are holding their noses at this company which gives me pause. Once the reason of this company low P/E ratio has been identified - if you believe that the company can overcome this challenge (e.g., Johnson & Johnson fixing Tylenol with revised packaging after their product had been tampered with) then this company could be a good buy. Unlike the small cap universe the large cap universe will very quickly recognize the change circumstances of this company and bid up its share price accordingly

  • Report this Comment On February 11, 2011, at 11:05 AM, lemoneater wrote:

    Corning is a durable, resilient company. They used to make inexpensive glassware during the depression like many other companies which are no longer in existence.The history of Depression Glass factories is fascinating. However rather than go under like many companies did when cheap tableware wasn't as much in demand, they diversified their products and improved their quality to meet the changing needs/wants of customers.

    I have GLW as a long term buy and hold. Shatterproof is a good characteristic for a glass business to have

  • Report this Comment On February 11, 2011, at 11:16 AM, Stonewashed wrote:

    Right now the corporate officers Wendell P Week is selling 486,095 shares per Yahoo Finance insider screen

    ___________

    http://www.secform4.com/insider-trading/24741.htm

    If you look closer, you will see there was some acquiring going on too, I do believe and not just him. Quite a few were exercising options to acquire and dispose of options.

    http://www.secform4.com/filings/24741/000112760210027128.htm

    At least that's the way it looks to me.

  • Report this Comment On February 11, 2011, at 3:49 PM, Merton123 wrote:

    I researched Corning on Value Line. The reason for the low P/E ratio was because company was forced to reduce the price of its LDC screens substantially for the holiday season. The gorilla glass segment hasn't cleared a profit yet. The value line analyst was bullish on Corning for the long run.

    I am bearish on Corning because it is in a commodity type business as reflected by the fact that it was forced to reduce its price of its LCD screens. Whoever can make the lowest cost LCD screen gets the order. Corning has formed joint venture with a Korean outfit to make this commodity good ofshore. I predict that the Japanese, Chinese will eventually controll this niche.

    The decline will be gradual so this is not a good candidate for shorting. Why would a Korean business want to purchase Corning which is situated in the wrong country (i.e., high wages and so-forth)? Corning only hope is again to change its product mix and get out of the low cost commodity business as it did back during the depression per a prior post.

  • Report this Comment On February 13, 2011, at 8:33 AM, Fred4953 wrote:

    Kudos to GLW for its loyalty to its workers and technical staff, by remaining in its eponymous city of Corning, New York State for over a century!! Think of all the relocation $$$ saved by that policy... Same goes for IBM, GE, Kodak, etc.

    To appreciate the Capital Costs needed to invest in "simple glass making" I'd suggest that Merton123 drive on up to Corning, NY to visit GLW's Glass Museum and tour its factory... It's not at all like "salt and pencils", Mert...

  • Report this Comment On February 21, 2011, at 1:20 AM, Citzenkane wrote:

    If you are a fan of Corning or want a glimpse of their (and your) future.

    http://www.youtube.com/watch?v=6Cf7IL_eZ38

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