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Corning Stands Up To The Heat

By Ryan Barnes

Tickers in this Article: GLW, SHCAY, IBM, CAT

Corning Incorporated (NYSE:GLW) is a venerated leader in specialty glass and ceramics products, and their leadership in glass materials for liquid-crystal display (LCD) televisions has propelled them out of a nasty downturn and into a leading industry with a 50% plus market share.

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New York-based Corning reported that net earnings tripled in the first quarter of 2008, as demand for more and larger LCD TVs grew despite the languishing U.S. economy. In addition, guidance was raised for the upcoming quarter and year in an all-around stellar earnings report.

For those whose last memories of Corning are as a nearly-bankrupt fiber optic producer, it's time to re-visit this company with a value stock's P/E ratio and a growth stock's prospects.

Earnings Liftoff
So how does a $42 billion market cap company triple earnings? You need success on several fronts, not the least of which is exceptional top-line growth. Corning was able to grow revenues by 24%, to $1.62 billion, which is a strong but misleading result. The two largest business segments - display technologies (LCD glass) and telecom (Fiber Optics) - showed vastly different results, as telecom revenues fell slightly while the display group grew by 58%. The display group even managed 7% sequential growth over the fourth quarter, thumbing its nose at the weak U.S. economy. Corning's international sales have helped too, a trend that we've seen pay big dividends for companies like Caterpillar (NYSE:CAT) and IBM (NYSE:IBM).

This growth in the glass materials used to make TVs is part of a broad switch underway in many households in the U.S. and abroad. LCD TVs are not only growing as a percentage of all that are sold, but the average size keeps getting bigger and bigger. This leads to wonderful growth in the volume of glass needed to fill out that big-screen TV. As such, the display segment's volume growth was up 50% in the first quarter, so even though spot prices fell nearly 10% year-over-year, the volume growth is more than making up for the loss.

Corning also expanded gross margins to 52% in quarter, a new record and up a full 800 basis points year-over-year. The final contributors to the terrific bottom-line growth were a low tax rate of 14% for the quarter, favorable currency movements (most LCD glass is sold in Japanese yen) and a one-time favorable gain from a longstanding asbestos settlement. Backing out the one-time gains, net income grew 55% year-over-year to $702 million - a little less dramatic than the raw triple in the headline figure, but still a fantastic result that sets the stage for strong earnings growth throughout the year. (Check out Earnings: Quality Means Everything for further reading on the analysis of earnings results.)

Prospects for 2008 - Going Wide(screen)
Even though the fiber optic segment was down slightly in the first quarter, management saw sequential revenue growth of about 10% in the second quarter, as some of the larger product installations were delayed in the beginning of the year. Fiber has been a rather weak segment ever since the infamous “glass glut” in the early part of this decade. It's taken much longer than most folks expected, but that capacity has finally been sucked up and the unit should turn a modest profit in 2008. The technology is still the proverbial future of broadband access, and this unit's profitability should show marked improvement over the next three to five years thanks to Corning's continued focus on R&D, which is budgeted for 10% of net sales each year.

As for the display tech group, the forecast is for top-line growth on the upper end of a 25-30% range for the full year, while gross margins should remain above 50%. A next-generation glass facility should be in full production later this year supplying glass to Sharp Corporation (OTC:SHCAY) televisions, which will add valuable capacity to Corning's plants - the company is currently operating at full capacity at its existing plants, and sees strong order strength and consistent pricing through 2009. (Be sure to read our related article Can Earnings Guidance Accurately Predict The Future to learn to analyze how companies comment on their forward-looking expectations.)

Parting Thoughts
Analysts are finally coming around to the stunning rebirth going on at Corning, and earnings estimates are on the rise, currently standing at around $1.80 per share for 2008. I think the company could actually come in above $2.00 based on the $0.44 reported in the first quarter and the strong top-line growth expected for the year. That puts the forward P/E at anywhere between 13- and 15-times earnings, which should prove far too low if the company can execute on its plans. I, for one, am not willing to bet against the continued adoption of high-def TVs; their continued sales growth in the face of a very weak U.S. consumer proves people would rather stay home and watch 50-plus inches of Corning-based glass than travel or spend on other luxury items.

For more information on how to invest in a slowing U.S. economy, read Surviving Bear Country.

By Ryan Barnes

Ryan Barnes has over 10 years experience in portfolio management and investment research, covering equities, fixed income and derivative products. Barnes has worked with Merrill Lynch, Charles Schwab, Morgan Stanley and many others as an institutional trader, and maintained AIMR compliant performance for a diverse set of high-net-worth investors.

Barnes is currently working as a writer and financial modeling consultant specializing in capital appreciation and hedging strategies, and is the editor of EpiphanyInvesting, a website devoted to finding long-term success in the stock market.

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