A 160-year-old company that produced light bulbs for Thomas Edison, bakeware for mom, mirrors for the Hubble Telescope, and iPhone screens? What investor wouldn't be proud to own stock in this company? As a 10% tumble after glassmaker Corning's (NYSE: GLW) latest earnings release revealed, quite a few.
Is this sell-off a good time to buy? Or are current owners looking through rose-colored glass? Let's take a look at all sides.
Buy:
A beautiful balance sheet. Corning sports a svelte balance sheet, with a debt-to-equity ratio of 0.11 and enough earnings to cover interest on its debt almost 40 times over. Along with no debt problems, Corning stuffed its free cash flow over the years into its overflowing bank of $5.8 billion in cash and equivalents. This cash powers both its dividend, which yields 2.3% and is in no danger at only a 13% payout ratio, and the research and development keeping Corning alive over the centuries. This leads to the second buy reason.
Innovation. Last year, Corning spent 8.5% of sales on research and development. This level of investment helped Corning enter its numerous industries and opens the possibility of future applications. Right now, Corning makes glass for monitors, televisions, tablets, phones, and cooktops, as well as fiber optic cable, catalytic convertor filters, and lab and cell culturing equipment. It also has joint ventures that produce materials for the semiconductor, solar-energy, and architecture industries. Even though it seems like a slow-moving manufacturer, it has plenty of potential to keep innovating. Just take a look at this YouTube video showing how Corning envisions the future.
Microsoft's (Nasdaq: MSFT) Surface 2.0 showcases the potential in application for Corning's super-strong Gorilla Glass. The newest Surface product began shipping in January with a 40-inch Samsung LCD -- albeit at a pricey $8,400. And of course, it is made with Corning's tough glass to make sure the screen will stand up to the pressures of touch computing and any object resting on the Surface's surface.
Sell:
Competition. Sales from the specialty materials division, which includes Corning's largest growth product, Gorilla Glass, doubled to more than $1 billion in 2011. However, Japanese companies Asahi Glass and Nippon Electric Glass are forming their own rivals to Gorilla Glass, like Asahi's Dragontail brand of glass, which it hopes will capture 30% of the market. With the search for more applications of strengthened glass, having a few competitors grab slices of the market may not mean much. But it does show that Corning's lead in technology is not insurmountable, and that could lead to lower margins with a product that could become more commoditized.
Dependent on a faltering industry. Corning's display technologies segment, which includes making glass for LCD screens, account for 90% of its profit. But as The Economist reports, none of the companies that produce LCD panels make money selling them. After 2011, Sony (NYSE: SNE) would lose money for the eighth year in a row in its TV business, while Panasonic's (NYSE: PC) TV segment expects to lose money for its fourth year in a row. To stem its losses, Sony sold its half of an LCD making joint venture it had with Samsung in December, taking $935 million in cash from Samsung and a charge of $846 million to write off the rest of the business. Both Sony and Panasonic also just had their debt ratings downgraded by Moody's, and Panasonic's debt ballooned from 100 billion yen to 550 billion yen last year. Panasonic Samsung Corning Precision, the joint venture between Corning and Samsung that produces LCD glass, may begin to feel a squeeze if the flat-panel business remains bleak.
Hold:
Low insider ownership. Insider ownership totals a measly 0.71%, but for a 160-year-old, $20 billion company, it might be hard for executives to own a larger share. However, even looking at the straight figures does not give an investor confidence. CEO Wendell Weeks holds only about $5 million worth of shares, after earning about $10 million a year since 2006. A better sign for shareholders would be for executives to hold at least a few years' worth of salary as stock.
My call
Our Stock Advisor service recommended Corning in August, and the price is even more attractive now. I've already made a bullish CAPScall, and I expect Corning to continue to pocket cash in new industries and applications over the long term, while continuing to share cash with investors.
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