6/26/2017
Corning Inc, NYSE: GLW
I picked up OLED some time ago because Organic liquid crystal displays "are the truth and the light" when it comes to cell phone screens for the present and future (and currently have limited market share). Corning has been in business for 166 years (1851) and arguably is well placed to continue to offer products to Industry and Consumer businesses alike. But what about that 10 year high in stock price? It developed Corning Ware once, can it do it again?
Price at write-up $30.23
1-year Target $29
Valuation Ratios
Price/Earnings (TTM) . . . . .8.23x (18.8 most recent quarter, Forward looking16.6)
Price/Sales (TTM) . . . . . . . 2.84x
Earnings per share . . . . . . . 3.65
Price/Book (MRQ) . . . . . . . 1.72x
Price/Cash Flow (TTM) . . . 5.28
Held by institutions . . . . . . . 72.53%
Short interest . . . . . . . . . . . . 2.18%
Dividend . . . . . . . . . . . . . . . $0.62/2.07%
MarketCap 27.8 B
To make this more digestible after looking at the stock performance itself I'll be looking over Corning's market segments and remind you of the significant numbers. For the most recent quarter, total sales are 2,416 million. Display Technologies 35%, Specialty materials 12.4%, Optical communications 33.8%, Environmental Technologies 11.4%, Life Sciences 8.7%. Corning is in a cutting-edge commodities business and might just be a sexy value trap.
PE looks strong for the industry on the face of it, exceptions noted for mrq and forward looking. Debt to equity of .21 is very low for the industry. Return on equity is strong but hardly stable fluctuating significantly year over year. While a bear market might hit this stock as strongly as any other, I'd expect it to continue to go sideways generally. I do really like it's historical return on invested capital, but have my doubts about that continuing. The declining growth in earnings per share supports that skepticism.
Twitter has made me very wary of share dilution and GLW is strong here with only a 2.17% increase from a year ago (TWTR is 4.75% over the same period this is offset by an apparent mission of dilution since IPO). The key difference might just be that Corning is profitable and Twitter is not, enabling GLW to regularly buy back shares and offer a dividend - while being on the record that it plans to continue both through 2018.
By a narrow margin, most of GLW's income (35%) comes from the "display technologies segment" which includes core components for all LCDs including those for TVs, Monitors, cellphones, tablets, and notebooks. This is where OLED/Universal Display corp. is going to eat Corning's lunch. OLEDs are just better in nearly every way, efficiency and black levels are a small highlight and I expect GLW to falter here. Display technology is already virtually a commodity though Corning can live here as long as it makes a visually better display than it's competitors, a display with superior material characteristics, manage to deliver the same product at a cheaper price, or out produce competitors. As far as I'm concerned it's definitely failing at the first two and is questionable on the third and fourth. But Corning's Display Technologies segment has grown 15% year over year (yoy) for the most recent quarter (Mrq).
Corning's "Specialty materials" segment (12.4% of sales) could be considered a crossover from the "Display technologies segment" in that Corning's Gorilla Glass is the market standard for Smartphone glass, even those phones that rightly choose OLEDs over LCDs, these sales are separate from the Display Technologies segment and grew 32% yoy for the mrq. As long as Corning is the market standard and can make meaningful and regular improvements (kind of a big if) this segment should continue to improve as long as competitors are closer to 20 years from replicating the process than 5.
(Optical communications.) Fiber optics is a continually growing field and a large portion of Corning's business (33.8% of sales). Currently, industries are the major purchasers of fiber-optic cable, notably ISPs with business products trailing mightily and residential applications a blip on the radar. This will continue until the robust backbone the telecom industry has promised becomes available. The Verizon deal on the table is slated to earn Corning a minimum of $1.05 billion through the purchase of 12.4 million miles of fiber-optic cable in 2018, 2019, and 2020. Much of that is already priced into GLW's share price, but it won't touch the bottom line until then. I'd only consider this a nice floor while Companies like Verizon are building up the backbone and interest in stronger residential speeds is unlikely to wane. These build outs are required for the residential and business user alike, but it also means that demand will remain pent up with no outlet until these capital investments are complete. The premium the industry will likely set for enterprise and residential use will likely delay market saturation meaning both a longer time horizon for GLW to provide fiber to the market (great for a durable materials provider) but likely meaning fast cheap internet is still some way away for the average user. Still, many telecommunications providers will need to grow the backbone for 5G and Corning is certainly a strong option for those providers. A durable good with several years of strong sales ahead of it. Optical communications is up 258% yoy for GLW's mrq.
Environmental Technologies (11.4% of sales) is charged with creating filters and ceramics for industry, mostly surrounding clean air applications. Sounds like a commodity to me. 0% growth yoy for the mrq.
Life Sciences 8.7%, lab equipment for biosciences. A staple producer of such things in the industry, Corning makes great equipment, a commodity that shouldn't go anywhere. 11% growth yoy for the mrq.
As a watch and smartphone enthusiast, Corning's glass in consumer level products is particularly interesting to me. Though it only represents a small portion (12.4%) of Corning's actual sales, and all personal devices of the future seem to need screens, Corning doesn't have all the solutions. While Gorilla glass itself is the market standard glass for cell phones, Al2O3 (Sapphire) is the standard for watches. I've almost never dropped a watch, but I bump them against things frequently enough. Sapphire is relatively cheap with nearly the hardness of a diamond so on a device that costs over $200 that is more likely to face scratches than impacts it just makes sense. In fact, you can't find a luxury watch without a Sapphire crystal, however, it's not well suited for a smartphone - hardness and scratch resistance also denote inflexibility and an inherent lack of impact resistance. The concave screen on my LG G4 perhaps offers one compelling reason scratch resistance is actually unnecessary, curve the screen and you eliminate most opportunities for scratches and retain impact resistance simply staying with Gorilla Glass 3 (still pristine after 2 years). Haveing owned more watches than any person has a right to, I will relay that my Sapphire crystal watches have never broken or scratched but I've chipped one or two after 5 years plus of heavy daily work use, these chips are however virtually unnoticeable and in no need of repair. Enter Corning's Project Phire which sounds good, an attempt to improve scratch resistance to sapphire levels, but probably won't ever have a market application.
The idea was to create something nearly as scratch resistant as sapphire while retaining similarly strong impact resistance. This product is allegedly coming to market as Corning Gorilla Glass SR+, but seems like a solution in need of a problem. SR+ was developed for watches and, while it isn't expressly clear from the press releases, the decision to completely exclude a smartphone application implicitly suggests it's ill-suited for them. So GLW created a product that isn't as good as the current industry standard, sapphire, to put on watches. However, it would be useful on the face of a phone if the market ridiculously decides not to embrace the concave phone - which actually seems pretty likely. Sadly, again, hardness/scratch resistance and fragility go hand in hand. So if SR+ is a compromise between Gorilla glass 5's impact resistance and sapphires hardness then it's not particularly useful in either application unless there is something special about Gorilla Glass SR+ in respect to its reflective and refractive indexes compared to the market standard sapphire - a not insignificant barrier when you're shining a light through them at close range, not to mention sapphire's general thickness. So I don't expect SR+ to become a market standard for watches because it's just not as good as sapphire. SR+ will likely just be a footnote to the achievements of Gorilla Glass.
Willow glass is an awesome concept before its time because I have no idea what it'll be good for. Like Kodak's development of the CCD in 1975 except with the foresight to let the world know the option was available if a manufacturer cared to use it. The CCD was quashed by Kodak, because it would compete with their film, until 1983 when Steven Sasson (creator) and Robert Hills released the first prototype of a DSLR. It's hard to say what the impact would have been if it would've been more fully developed earlier, Kodak would probably still be around. Even after developing the digital camera in-house, they still bet on film. Stories like this are how Kodak went from being Kodak to being Kodak. And Apple went from being Apple to becoming Apple. It has no viable current application, just like multi-touch, laptops, digital music storage and playback, electric vehicles, or selling books & stuff on the internet (Amazon) similarly lacked a real use case when developed. I'm not sure that a bendable screen will ever be useful, but I didn't see Amazon or electric vehicles coming. I'm not sure a flexible screen has any purpose as a wearable while the other constituents of modern technology are anything but flexible. And I honestly don't see how it could go anywhere unless it can become useful in fabric and solar tech, but it is awesome.
The prospect of groundbreaking innovation goes further with pilot programs to develop automotive glass, something I'm sure Corning can pull off - but I'm not sure to what end. Though I do expect future generations of driver assisted and self-driving vehicles to use it. The returns on that are wholly unknown because while we use lots of glass in cars is there any compelling reason to change to Corning's? Will it be like the change of sheet glass to tempered glass, or the difference between organic "fruit wash" and bleach (both are bleach, at the same concentrations there is no benefit, read the labels!)?
EPS is projected to go down by 0.8% in 2018 and 0.9% in 2019.
Conclusion
Is it still cheap at a ten year high? Perhaps with today's apparent PE, but not to forward-looking PEs. The "Fiber to home" drive from telecoms should continue to drive GWL's core business while it continues to expand its other offerings, and Gorilla Glass isn't going anywhere. These are great products, I still have that 2-year-old phone and expect to keep it at least another year. And other consumers are waiting longer between upgrades as well. I've had my plasma TV for nearly 10 years, my next one will likely be an OLED. This is a significant barrier to businesses like Corning who can't make money selling the end user apps, they're a hardware/commodity business and dependant on the sale of durable goods. And a consumer won't buy them if they aren't durable and affordable. This could be offset by market penetration, but that will only go so far. This is a lasting problem for durable goods and why I generally stay away from them as investments but love to purchase them.
EPS growth is declining and that's not good for a long term hold. So where is it? As a short-term (less than 1 year) position I believe I could stomach it. A medium-term (up to 5 years) is possibly more favorable but with some reasonable doubt, noting the declining EPS growth and the general sale structure of durable goods. At this point, a long term position (about 10 years) is more questionable still. I have no idea where Corning will be in 10 years and some reason to doubt they'll do as well as any other holdings I have . . . but if I were to guess I'd say sideways and down. They'd have to create a great growth story for me to change my mind on that, and automotive glass could hedge that.
I already own shares of Universal Display Corporation (NASDAQ:OLED), and they will be the focus of a much-delayed upcoming write-up. That said I like both companies for similar reasons though organic light-emitting diodes are the truth and the light for all displays befitting human eyes and SmartPhones are one of the strongest cases of such screens. It doesn't matter if Samsung or Apple win the Smartphone wars, the face of their technology will likely use one or both of these companies products.
If I were to buy GLW I'd either jump in around now and ride the momentum which is generally not a great idea or wait for a pull back and cost average in. One-third at 28.80 to have some room at the $29 price target would be nice if I really wanted in quickly. Pursuing the same short to medium term strategy I'd like to get the next half the shares at under $26.40, a fairer long term hold price.
But then I'd remember that it dropped to $9 during the market crash of 2008 from $27.50 so it historically hasn't had resistance to market corrections so it's not exactly in my "sideways in a hurry" class of stocks and there's very little case for growth. So what place would it really have in my portfolio? I love a lot of Corning's products, they're a market leader with good management and a history of rewarding investors. This is a fancy commodities stock with a lot of market risks and competitors. This would've been a great buy in 2008 or 2012. Today I think $28 is a fair short-term price, but I don't think I'd want it for much more than $26 as a long term investor. Given its historic volatility and all that I now know about GLW's product line, $17 (without a split), would be a reasonable fear if I were to hold for the next 3-5 years. That's a lot of downside risk for me at anything more than about the $20 level, and that's what I'd want my average cost basis to be. So if I decide to pick it up it'll be at around $26 with an expectation of increasing my holdings if it drops below $20.
As of this writing, I have no shares or interests in GLW. However, it is now in my watchlist of potential puts (I would sell the promise to buy GLW shares if the price were to drop to a predetermined level to someone who wanted to protect themselves against the downside risk).
Due Diligence - OLED, LFUS, AVT, TEL, APH
Corning Inc, NYSE: GLW
I picked up OLED some time ago because Organic liquid crystal displays "are the truth and the light" when it comes to cell phone screens for the present and future (and currently have limited market share). Corning has been in business for 166 years (1851) and arguably is well placed to continue to offer products to Industry and Consumer businesses alike. But what about that 10 year high in stock price? It developed Corning Ware once, can it do it again?
Price at write-up $30.23
1-year Target $29
Valuation Ratios
Price/Earnings (TTM) . . . . .8.23x (18.8 most recent quarter, Forward looking16.6)
Price/Sales (TTM) . . . . . . . 2.84x
Earnings per share . . . . . . . 3.65
Price/Book (MRQ) . . . . . . . 1.72x
Price/Cash Flow (TTM) . . . 5.28
Held by institutions . . . . . . . 72.53%
Short interest . . . . . . . . . . . . 2.18%
Dividend . . . . . . . . . . . . . . . $0.62/2.07%
MarketCap 27.8 B
To make this more digestible after looking at the stock performance itself I'll be looking over Corning's market segments and remind you of the significant numbers. For the most recent quarter, total sales are 2,416 million. Display Technologies 35%, Specialty materials 12.4%, Optical communications 33.8%, Environmental Technologies 11.4%, Life Sciences 8.7%. Corning is in a cutting-edge commodities business and might just be a sexy value trap.
PE looks strong for the industry on the face of it, exceptions noted for mrq and forward looking. Debt to equity of .21 is very low for the industry. Return on equity is strong but hardly stable fluctuating significantly year over year. While a bear market might hit this stock as strongly as any other, I'd expect it to continue to go sideways generally. I do really like it's historical return on invested capital, but have my doubts about that continuing. The declining growth in earnings per share supports that skepticism.
Twitter has made me very wary of share dilution and GLW is strong here with only a 2.17% increase from a year ago (TWTR is 4.75% over the same period this is offset by an apparent mission of dilution since IPO). The key difference might just be that Corning is profitable and Twitter is not, enabling GLW to regularly buy back shares and offer a dividend - while being on the record that it plans to continue both through 2018.
(Optical communications.) Fiber optics is a continually growing field and a large portion of Corning's business (33.8% of sales). Currently, industries are the major purchasers of fiber-optic cable, notably ISPs with business products trailing mightily and residential applications a blip on the radar. This will continue until the robust backbone the telecom industry has promised becomes available. The Verizon deal on the table is slated to earn Corning a minimum of $1.05 billion through the purchase of 12.4 million miles of fiber-optic cable in 2018, 2019, and 2020. Much of that is already priced into GLW's share price, but it won't touch the bottom line until then. I'd only consider this a nice floor while Companies like Verizon are building up the backbone and interest in stronger residential speeds is unlikely to wane. These build outs are required for the residential and business user alike, but it also means that demand will remain pent up with no outlet until these capital investments are complete. The premium the industry will likely set for enterprise and residential use will likely delay market saturation meaning both a longer time horizon for GLW to provide fiber to the market (great for a durable materials provider) but likely meaning fast cheap internet is still some way away for the average user. Still, many telecommunications providers will need to grow the backbone for 5G and Corning is certainly a strong option for those providers. A durable good with several years of strong sales ahead of it. Optical communications is up 258% yoy for GLW's mrq.
Environmental Technologies (11.4% of sales) is charged with creating filters and ceramics for industry, mostly surrounding clean air applications. Sounds like a commodity to me. 0% growth yoy for the mrq.
Life Sciences 8.7%, lab equipment for biosciences. A staple producer of such things in the industry, Corning makes great equipment, a commodity that shouldn't go anywhere. 11% growth yoy for the mrq.
As a watch and smartphone enthusiast, Corning's glass in consumer level products is particularly interesting to me. Though it only represents a small portion (12.4%) of Corning's actual sales, and all personal devices of the future seem to need screens, Corning doesn't have all the solutions. While Gorilla glass itself is the market standard glass for cell phones, Al2O3 (Sapphire) is the standard for watches. I've almost never dropped a watch, but I bump them against things frequently enough. Sapphire is relatively cheap with nearly the hardness of a diamond so on a device that costs over $200 that is more likely to face scratches than impacts it just makes sense. In fact, you can't find a luxury watch without a Sapphire crystal, however, it's not well suited for a smartphone - hardness and scratch resistance also denote inflexibility and an inherent lack of impact resistance. The concave screen on my LG G4 perhaps offers one compelling reason scratch resistance is actually unnecessary, curve the screen and you eliminate most opportunities for scratches and retain impact resistance simply staying with Gorilla Glass 3 (still pristine after 2 years). Haveing owned more watches than any person has a right to, I will relay that my Sapphire crystal watches have never broken or scratched but I've chipped one or two after 5 years plus of heavy daily work use, these chips are however virtually unnoticeable and in no need of repair. Enter Corning's Project Phire which sounds good, an attempt to improve scratch resistance to sapphire levels, but probably won't ever have a market application.
The idea was to create something nearly as scratch resistant as sapphire while retaining similarly strong impact resistance. This product is allegedly coming to market as Corning Gorilla Glass SR+, but seems like a solution in need of a problem. SR+ was developed for watches and, while it isn't expressly clear from the press releases, the decision to completely exclude a smartphone application implicitly suggests it's ill-suited for them. So GLW created a product that isn't as good as the current industry standard, sapphire, to put on watches. However, it would be useful on the face of a phone if the market ridiculously decides not to embrace the concave phone - which actually seems pretty likely. Sadly, again, hardness/scratch resistance and fragility go hand in hand. So if SR+ is a compromise between Gorilla glass 5's impact resistance and sapphires hardness then it's not particularly useful in either application unless there is something special about Gorilla Glass SR+ in respect to its reflective and refractive indexes compared to the market standard sapphire - a not insignificant barrier when you're shining a light through them at close range, not to mention sapphire's general thickness. So I don't expect SR+ to become a market standard for watches because it's just not as good as sapphire. SR+ will likely just be a footnote to the achievements of Gorilla Glass.
Willow glass is an awesome concept before its time because I have no idea what it'll be good for. Like Kodak's development of the CCD in 1975 except with the foresight to let the world know the option was available if a manufacturer cared to use it. The CCD was quashed by Kodak, because it would compete with their film, until 1983 when Steven Sasson (creator) and Robert Hills released the first prototype of a DSLR. It's hard to say what the impact would have been if it would've been more fully developed earlier, Kodak would probably still be around. Even after developing the digital camera in-house, they still bet on film. Stories like this are how Kodak went from being Kodak to being Kodak. And Apple went from being Apple to becoming Apple. It has no viable current application, just like multi-touch, laptops, digital music storage and playback, electric vehicles, or selling books & stuff on the internet (Amazon) similarly lacked a real use case when developed. I'm not sure that a bendable screen will ever be useful, but I didn't see Amazon or electric vehicles coming. I'm not sure a flexible screen has any purpose as a wearable while the other constituents of modern technology are anything but flexible. And I honestly don't see how it could go anywhere unless it can become useful in fabric and solar tech, but it is awesome.
The prospect of groundbreaking innovation goes further with pilot programs to develop automotive glass, something I'm sure Corning can pull off - but I'm not sure to what end. Though I do expect future generations of driver assisted and self-driving vehicles to use it. The returns on that are wholly unknown because while we use lots of glass in cars is there any compelling reason to change to Corning's? Will it be like the change of sheet glass to tempered glass, or the difference between organic "fruit wash" and bleach (both are bleach, at the same concentrations there is no benefit, read the labels!)?
EPS is projected to go down by 0.8% in 2018 and 0.9% in 2019.
Conclusion
Is it still cheap at a ten year high? Perhaps with today's apparent PE, but not to forward-looking PEs. The "Fiber to home" drive from telecoms should continue to drive GWL's core business while it continues to expand its other offerings, and Gorilla Glass isn't going anywhere. These are great products, I still have that 2-year-old phone and expect to keep it at least another year. And other consumers are waiting longer between upgrades as well. I've had my plasma TV for nearly 10 years, my next one will likely be an OLED. This is a significant barrier to businesses like Corning who can't make money selling the end user apps, they're a hardware/commodity business and dependant on the sale of durable goods. And a consumer won't buy them if they aren't durable and affordable. This could be offset by market penetration, but that will only go so far. This is a lasting problem for durable goods and why I generally stay away from them as investments but love to purchase them.
EPS growth is declining and that's not good for a long term hold. So where is it? As a short-term (less than 1 year) position I believe I could stomach it. A medium-term (up to 5 years) is possibly more favorable but with some reasonable doubt, noting the declining EPS growth and the general sale structure of durable goods. At this point, a long term position (about 10 years) is more questionable still. I have no idea where Corning will be in 10 years and some reason to doubt they'll do as well as any other holdings I have . . . but if I were to guess I'd say sideways and down. They'd have to create a great growth story for me to change my mind on that, and automotive glass could hedge that.
I already own shares of Universal Display Corporation (NASDAQ:OLED), and they will be the focus of a much-delayed upcoming write-up. That said I like both companies for similar reasons though organic light-emitting diodes are the truth and the light for all displays befitting human eyes and SmartPhones are one of the strongest cases of such screens. It doesn't matter if Samsung or Apple win the Smartphone wars, the face of their technology will likely use one or both of these companies products.
If I were to buy GLW I'd either jump in around now and ride the momentum which is generally not a great idea or wait for a pull back and cost average in. One-third at 28.80 to have some room at the $29 price target would be nice if I really wanted in quickly. Pursuing the same short to medium term strategy I'd like to get the next half the shares at under $26.40, a fairer long term hold price.
But then I'd remember that it dropped to $9 during the market crash of 2008 from $27.50 so it historically hasn't had resistance to market corrections so it's not exactly in my "sideways in a hurry" class of stocks and there's very little case for growth. So what place would it really have in my portfolio? I love a lot of Corning's products, they're a market leader with good management and a history of rewarding investors. This is a fancy commodities stock with a lot of market risks and competitors. This would've been a great buy in 2008 or 2012. Today I think $28 is a fair short-term price, but I don't think I'd want it for much more than $26 as a long term investor. Given its historic volatility and all that I now know about GLW's product line, $17 (without a split), would be a reasonable fear if I were to hold for the next 3-5 years. That's a lot of downside risk for me at anything more than about the $20 level, and that's what I'd want my average cost basis to be. So if I decide to pick it up it'll be at around $26 with an expectation of increasing my holdings if it drops below $20.
As of this writing, I have no shares or interests in GLW. However, it is now in my watchlist of potential puts (I would sell the promise to buy GLW shares if the price were to drop to a predetermined level to someone who wanted to protect themselves against the downside risk).
Due Diligence - OLED, LFUS, AVT, TEL, APH