Is Corning Destined for Greatness?

Every investor can appreciate a stock that consistently beats the Street without getting ahead of its fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with improving financial metrics that support strong price growth. Let's take a look at what Corning's (NYSE: GLW  ) recent results tell us about its potential for future gains.

What the numbers tell you
The graphs you're about to see tell Corning's story, and we'll be grading the quality of that story in several ways.

Growth is important on both top and bottom lines, and an improving profit margin is a great sign that a company's become more efficient over time. Since profits may not always reported at a steady rate, we'll also look at how much Corning's free cash flow has grown in comparison to its net income.

A company that generates more earnings per share over time, regardless of the number of shares outstanding, is heading in the right direction. If Corning's share price has kept pace with its earnings growth, that's another good sign that its stock can move higher.

Is Corning managing its resources well? A company's return on equity should be improving, and its debt-to-equity ratio declining, if it's to earn our approval.

Healthy dividends are always welcome, so we'll also make sure that Corning's dividend payouts are increasing, but at a level that can be sustained by its free cash flow.

By the numbers
Now, let's take a look at Corning's key statistics:

GLW Total Return Price Chart

GLW Total Return Price data by YCharts.

Criteria

3-Year* Change

Grade

Revenue growth > 30%

56.7%

Pass

Improving profit margin

(41.2%)

Fail

Free cash flow growth > Net income growth

1,490% vs. 27.6%

Pass

Improving EPS

28.3%

Pass

Stock growth (+15%) < EPS growth

(13%) vs. 28.3%

Pass

Source: YCharts. *Period begins at end of Q3 2009.

GLW Return on Equity Chart

GLW Return on Equity data by YCharts.

Criteria

3-Year* Change

Grade

Improving return on equity

(18.7%)

Fail

Declining debt to equity

15.5%

Fail

Dividend growth > 25%

80%

Pass

Free cash flow payout ratio < 50%

42.1%

Pass

Source: YCharts. *Period begins at end of Q3 2009.

How we got here and where we're going
It's hard to argue with six out of nine passing grades here. Corning's major problem, which no doubt kept investors away last year, is a weakened profit margin that's hurt Corning's ability to improve its return on equity. Although Corning's debt-to-equity ratio has been on the upswing, the company recently took steps to reduce its outstanding debts, and with a cash hoard nearly double the amount of its outstanding debts, there's no reason to be concerned about the company taking advantage of borrowing rates that are at historically low levels. Free cash flow has grown very strongly over the past three years, but it started at virtually zero, and remains well below net income. Can Corning improve its fortunes enough in the upcoming year to turn that declining margin around?

The past year was quite the up-and-down one for Corning, which struggled mightily to keep its stock price above the level at which it began 2012. My fellow Fool Rich Smith offers a good recap of those ups and downs, from a false start in the first quarter to a surprising bounce in November after unexpectedly good guidance.

That guidance had bullish notes on both the company's cash-cow LCD segment and the next-big-thing Gorilla Glass segment, which has been adopted by both Apple (NASDAQ: AAPL  ) and Google (NASDAQ: GOOGL  ) in their popular mobile devices. An anticipated $1 billion revenue run rate on Gorilla Glass would be very impressive, except that the specialty materials segment it's part of has never generated meaningful profit. Corning has remained almost entirely dependent on the LCD-panel display technologies segment for a decade, and that segment has had far fatter margins from its earliest days than specialty materials has ever managed.

The problem, as Fool tech bureau chief Eric Bleeker points out, is that the purchase of a smartphone often precludes that consumer buying a big-screen TV or a new laptop or desktop, which offer much larger display areas that generate Corning greater earnings. As a quick comparison, one iPhone 5 has 6.7 square inches of display area. Corning needs Apple to sell 160 iPhones to equal the display area of a single 50-inch TV, and by all indications, that 50-inch TV generates much fatter margins for Corning than 160 iPhones. The same concerns have helped depress Universal Display (NASDAQ: OLED  ) , which has had its display technologies primarily featured in Samsung smartphones, as OLEDs tend to jack up the price of TVs beyond what many consumers are willing to pay.

Ultimately, Corning's future as an investment may hinge on its ability to improve the profitability of its mobile glass coverings. That's something to watch when the company releases its next earnings report. Keep your eyes open for it later this month.

Putting the pieces together
Today, Corning has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

With the explosive growth of smartphones worldwide, many investors thought they would ride Corning's dominant cover glass to massive investment returns. That hasn't played out yet, as mobile growth has failed to offset declines in the company's core business. In this brand-new premium research report on Corning, our analyst walks interested investors through Corning's business, as well as the key opportunities and risks facing it today. Click here to claim your copy, and receive a full year of updates as key events unfold.


Read/Post Comments (3) | Recommend This Article (7)

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 January 03, 2013, at 10:42 AM, sidneyleejohnson wrote:

    I'm not convinced that buying a smartphone precludes one from buying a big screen TV. Rather the "lurking variable" here is that everyone already has a big screen TV of sufficient technology (LCD) to keep up with the Joneses. Essentially there has not been a break through technology in TV for some time to require one to replace their LCD TV they bought 3-5 years ago...and the lifetime of the LCD TV is sufficient...as well as the size. TV OEM's want high end consumers to choose between OLED TV And UHD TV (even though eventually one would expect a UHD OLED TV) in 2013(14?). If OLED TV is enough of a breakthrough and the OEMs would have us believe it is... the consumers would then be looking at finding the $ once the price comes down with mass production volume (LG production lines M1, M2, SMD V1, V2). LG has the opening with its taking pre-orders and shipping oled TV in Feb. OLED is pricing TVs higher due to the fact they aren't being produced in volume... once the volume capacity and yield are sufficient prices fall dramatically. Compared to the original oled 11" TV from Sony even $10k/55" TV is a dramatic reduction in price for an oled TV... but start cranking out 1-2 million TV/year from M2(LG) and the price starts falling fast. Once the volume is there consumers will be happy to pay a slight premium for an oled screen but I'm not convinced a premium will be apparent (look at Galaxy S3 vs Iphone 5...is a premium apparent there?- GS3 is produced in volume from oled lines A1 and A2 and hit 75K substrates per month(growing to 100k in 2013). There is no volume to speak of yet from V1, V2. And the wild card is LG's M1, M2. Considering they are saying they are shipping in Feb 2013 and taking orders now for oled tv ...the question for corning should be does oled TV by LG(or SMD) even use glass from Corning. A thin film encapsulation model for cellphones and/or OLED TV would devastate Corning if this path bypasses them and they replace existing technology that uses glass. Potential Disruption is high.

  • Report this Comment On January 03, 2013, at 10:46 AM, sidneyleejohnson wrote:

    Last comment ...Corning is trying to market something called "Willow" glass to the oled market to try to stay in the oled game. The thin-film encapsulation path though may take them out of the game. Its a dynamic situation but it isn't clear whether they would be the ones producing the thin-film material for oled. Time will tell but they are actively trying to stay in the oled marketplace.

  • Report this Comment On January 03, 2013, at 10:47 AM, sidneyleejohnson wrote:

    Ok Never say last...but the marketing of flexible oleds ...FOLED in 2013 as "unbreakable displays" could be a big problem for corning if they aren't the ones producing the materials used for such a "UNB" oled display. Consumers hate broken glass screens and this could turn out to be a very big deal.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2175026, ~/Articles/ArticleHandler.aspx, 11/27/2014 6:56:44 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement