Once touted as a darling of fiber optics in the go-go '90s, glassmaker Corning (NYSE: GLW) was shattered into shards when the tech bubble ruptured in 2000. But the company has found its luster again. The rollout of a new line of glass used mainly in smartphones has opened up a new portal of growth for the company. That along with rebounding global operations and an attractive valuation makes Corning an enticing investment.
Corning Goes Gorilla
The glassmaker has a new growth portal: "gorilla glass," or hard-to-break, scratch resistant glass. As opposed to plastic, glass is becoming the choice material for use in touch devices. With the advent and rapid adoption of devices like smartphones on Google's (Nasdaq: GOOG) Droid platform or other products modeled after Apple's (Nasdaq: AAPL) iPad tablet, Corning believes more devices will go the way of touch design and therefore there will be more demand for its product. The company, therefore, is a way to play the touchscreen boom while being relatively manufacturer agnostic.
Corning says it holds the market leading position in the manufacture of this glass. In December, management was projecting this business line to produce proceeds of $300 million in the next several years. Now that assumption has been ramped up to $1 billion in annual sales by 2012. In fact, Corning is starting production in Japan while operating at capacity at its Kentucky plant.
Company sales have risen with global growth
Aside from a new business line, Corning is picking up steam from the global recovery. The company says it's seeing solid growth in the LCD TV market. That's important because Corning controls the market to the tune of 60%. What's more, Corning is projecting an increase in volume in 2010 because of strong demand for LCD-TVs, laptops, and desktop computers. The company increased its 2010 glass market estimate to a range by 1 billion square feet.
These statistics are notable since we are no longer at the early stage of the LCD market cycle. Corning says Japan could be a source of growth, with consumers there upgrading their LCD TV sets to larger units at a 3-to-1 rate. The company says it's watching Japan closely to see if that market is a precursor for other markets.
This year Corning says a "significant portion" of the growth in LCD televisions will be outside of the United States and Europe. In fact, China is Corning's largest market. This is good because the U.S. consumer is still not back. For instance, Best Buy's (NYSE: BBY) same-store sales of TV's were down significantly in the latest quarter.
Growth by the numbers
A look at the numbers backs up Corning's story and financial health. For the first quarter, the latest quarter for which data was available, net sales spiked 57% compared with the first quarter of 2009 on demand for the company's glass products. Sales in the display technologies unit more than doubled, good news because it is Corning's dominant segment. Gross margin was 47% in the quarter; up from 27% in the same quarter last year. Although the comparisons are quite easy, as the first quarter of 2009 was the bleakest quarter of the recession, gross margin showed sequential improvement as well.
Corning ended the first quarter with $3.9 billion in cash and equivalents, posting positive free cash flow in the quarter for the first time since 2004. Typically free cash flow in the first quarter is negative.
And the momentum is continuing. The second quarter is on track, according to company management. The company raised its 2010 forecast for all LCD products, stating inventories are positioned well. Also Corning is "very excited about the start-up" of its billion dollar silicon plant in China. Corning, via Hemlock Semiconductor, has supplied both LDK Solar (NYSE: LDK) and Trina Solar (NYSE: TSL) in the past, and noted that the "solar market is improving both in volume and the stabilization of spot price."
Risks to the investment thesis
Like any investment thesis, this one carries its own risks. We've begun to see a moderation in economic data globally. Manufacturing across the world from the Asia-Pacific region -- notably China -- to Europe and the U.S. has slowed down. Economists aren't sure if it's a natural pause as the global economy works its way back to recovery or something more. Should a slowdown in the global recovery occur, that would likely impact Corning's sales. Although the potential for a double dip is on the table, the chances are more likely that we only see a moderation in growth versus a drop back into negative territory.
Still the prospects for Corning look good and the market pull back has created an even more attractive valuation for the glassmaker. At $16 and change per share, Corning trades at a 9.2 times last year's earnings compared with 19.3 times for the industry. None of the analysts surveyed have a sell rating on this stock with 11 out of the 24 rating it as a strong buy, putting a median target of $24 on the shares.
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