Corning (NYSE:GLW) has had a rough go of it these past three years. The company is the world's largest manufacturer of fiber-optic cable, and at one time it relied on the telecom industry for more than half of its revenues. Enough said, right? Corning took its lumps right along with Lucent (NYSE:LU), Cisco Systems (NASDAQ:CSCO), and Nortel Networks (NYSE:NT). I live in Denver -- home to many of the country's best-known telecom companies -- and did a stint in IT, so the telecom depression hit home, creating a glut of out-of-work tech employees.
Corning, based in Corning, N.Y., laid off well over 10,000 employees, or more than 25% of its workforce, and has spent the last three years selling or shutting down unprofitable businesses. These are necessary cutbacks during a recession, but not the source of Corning's comeback.
Neither are fiber-optic sales, which are expected to stabilize this year, being flat to down 5%. However, fiber-optic sales are a source of significant potential growth for the company. Fiber to the premises (FTTP) technology has been talked about for many years, but has been slow to catch on. During their glory days in the late 1990s, the phone companies waged war to see who could lay the most fiber-optic cable, stringing it well beyond city borders. While the build-out has abated, it hasn't stopped completely. Verizon Communications (NYSE:VZ), for example, plans to run fiber to a million homes and businesses this year, and Corning is a lead supplier.
Fast times for fiber?
With few exceptions, however, fiber isn't making its way into U.S. homes just yet. Americans are still euphoric about "always on" Internet connections via cable and DSL, no longer having to dial up and endure the agony of waiting for Web pages to load. The problem is that bandwidth demands are rapidly increasing as more and more services are rolled out. Soon, fiber will have to be an accepted alternative, because it has 30 to 50 times the bandwidth of copper.
The transition to fiber is already happening, and in the most unexpected of places. As rural communities set about the task of replacing old, decrepit copper lines, they are installing fiber. And the residents of a few small rural communities are voting to spend extra tax dollars on large-scale fiber-optic network projects. Why? Because they're tired of not being able to get cable television or broadband Internet service. Another source for FTTP usage is new high-end planned communities, where builders are finding that running fiber under the neighborhood's unnaturally green sod is easy, and the advantage of an advanced technological infrastructure is a major selling point when it comes time to market the homes.
While the number of existing homes with fiber is still very small, the number is growing and -- due to projects like Verizon's -- has the potential to skyrocket. It will happen sooner rather than later if teenagers have anything to say about it, since they are consuming massive quantities of bandwidth.
Corning estimates that it has a market opportunity of $60 to $100 for each home passed by a phone company's main lines. That's the potential revenue derived from the sale of fiber-optic cable and equipment as the phone company installs it passed a home. And for every home hooked up, it has a market potential of $70 to $120 from the cable and equipment sold to route the fiber-optic lines to the home and connect it to the home's wiring. The potential revenue stream is there, though it's not yet an immediate source of profit for the company.
LCD to elevate earnings
In its first-quarter earnings guidance, Corning said that it expects to swing to a profit, thanks to growth in demand for liquid crystal display (LCD) glass. From the third to fourth quarters of 2003, LCD glass revenues increased 39%. About half of this increase was attributed to growing volume, and half to favorable exchange rates. The real story here, though, is the growth in demand for flat-panel displays.
Sales of LCD TVs, which are a small part of total flat-panel sales, increased to more than 4 million in 2003, up significantly from less than 1.5 million in 2002. LCD TV sales are projected to hit 35 million by 2007. These statistics leave no doubt that flat-panel display sales have exploded, and will continue to grow. The displays are becoming increasingly easier -- and cheaper -- to make, are smaller and lighter to ship, and are better in just about every way for consumers than fat TVs. Skinny TVs only have to come down in price before many millions more Americans replace their old, clunky units.
Given the capital spending companies are pouring into manufacturing, the cost of LCD flat-screen TVs should be dropping quickly by now. Samsung and Sony (NYSE:SNE) have announced a joint venture. LG Electronics and Philips (NYSE:PHG) have come together to form LG Philips and are spending $2.5 billion on a new factory. Then there's market leader Sharp with its 29% share. But there's one problem: the glass.
The glass accounts for 65% of the production cost. Corning has cornered more than 50% of the market share on glass, and first-quarter capacity is sold out. So it's going to take time for competition to step in, ramp up, and drive down the price of the glass. In fact, Corning plans to spend $600 million over the next two years on increasing capacity. But wouldn't competition combined with satiating demand be bad for Corning?
As convoluted as it may sound, competition for LCD glass could actually help Corning tremendously. The market for LCD displays is ready to be tapped. Consumers are hovering over the flat-screen TVs displayed prominently in big, techy supermarkets, just waiting for prices to come down. But they won't when essentially one company is supplying the most-expensive component, and enjoying a near monopoly. So cost is actually limiting sales potential.
The immediate concern for investors is shrinking margins and excess competition. But consider this: Of the LCD glass Corning sells, the majority of it is used for laptop computers. The reason for this is that the heated competition for laptops has driven the prices down to the point that millions of consumers are now willing to buy them -- people who never would have considered purchasing a laptop just a couple of years ago. They are better and more affordable than ever before, and that appetite is driving demand for Corning glass.
It will be the same for TVs. Once prices drop, sales will increase. And despite the additional competition, Corning's glass sales will likely increase more than enough to compensate for the growing competition and smaller margins.
Additionally, consumers are bound to start questioning rather boisterously why LCD TVs cost $1,500 while LCD computer monitors only cost about $300. Consumers are going to want to know what's in the TVs that makes them cost so much more. The answer: very little. It's still a high-margin business. But soon knockoff brands will be readily available at significantly reduced prices, which will spark a price war. There are at least a dozen companies in China rushing to get cheap flat-screens into the worldwide market.
But even with the high price of LCD TVs, the overall growth is excellent. Flat-panel manufacturers spent approximately $6.5 billion on LCD components last year, and are expected to jump at least 30% to more than $8 billion this year. So however this classic supply/demand saga plays out, with its current market share of more than 50% for LCD glass, Corning is sitting pretty.
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Motley Fool contributor Mark Mahorney is an antagonist residing in Denver, and promises to respond cynically to all emails. He does not own shares of any of the companies mentioned in this article. The Motley Fool is investors writing for investors.
