“We’ve featured Corning, Inc. (GLW 16.68 NYSE) in the Green portfolio before, in the early half of 2009, as a play on overly negative expectations on consumer television sales that fuel its LCD glass business (the portfolio made a 15% profit on the holding). Why return to Corning now? A few reasons. For one, if you concur with the growth story we see and detail below, shares are exceptionally cheap at a mere nine times current year and 2011 earnings. Its size and dividend also make it a slightly more defensive play in Green if the market continues to waffle. Primarily, however, we’re excited by the emergence of a technology invented in 1962 that languished without an appropriate market for 45 years until 2007: Gorilla glass.
“Gorilla glass is glass that can be thinner than a dime, lightweight, difficult to scratch and can handle touch screen usage over time. It also is better than other glass at handling the impact of drops and falls. Other glass is available that can do many of those things more cheaply (plastic is an also-ran, since it is inferior to glass in many ways in these situations), but Corning bets that the extra cost, perhaps $50 more on a typically sized television, is made up for by its excellent performance and the fact that the company’s proprietary fusing process is done in a method more environmentally friendly than other chemically reinforced glass.
“Around the time smart phones like the iPhone started coming out, Corning dusted off Chemcor in hopes of finding a new market, running it through accelerated testing and development from 2006 to 2008, while changing the name to the more marketing-friendly Gorilla glass. Last year, the company announced initiatives with companies like Samsung, Dell, LG and Motion Computing to use Gorilla glass. Right now the glass is used in the best selling Droid smart phone and is believed to be in the iPad. (Corning cannot confirm its use in the iPad, noting many of its 19 customers have non-disclosure agreements.)
“This year, in its first full year of sales, Gorilla glass generated $250 million and helped power Corning’s specialty materials group sales up 31% in the most recent quarter, ended June 30. There’s a good chance that’s a prelude of what’s to come with tablet and smart phone sales surging. And next year, it’s expected that television makers will roll out lines of stylish LCD televisions that, because of Gorilla glass’ strength, will have no frames. Just how much Gorilla glass Corning will sell is a big unknown, and a reason the stock price has yet to, we believe, fully reflect Gorilla glass’ business effect. ...
“Without Gorilla glass, Corning has been doing well for itself anyway. LCD television sales—for which Corning provides the specialized glass—never fell as far as feared in 2009 and are performing well this year, beating expectations in the first half of the year, although sales for the rest of the year are expected to be steady. The display segment grew 24% last quarter compared to the year-prior, to $834 million.“Corning also has its hands in other Green areas. Its environmental business focuses on sophisticated pollution control equipment such as ceramic substrates and diesel particulate filters; although that segment hinted at some weakness in the second quarter, sales still grew 39% year over year to $184 million. ...
Corning also owns a chunk of Hemlock Semiconductor, one of the largest polysilicon providers in the world, which contributes over $100 million a quarter to Corning’s bottom line. Corning also owns half of Dow Corning.“Overall, Corning’s second quarter sales were up 23% to $1.7 billion, net earnings per share was 58 cents, up from 39 cents and gross margin was up to 49%, from 47%. Corning generates just under $6 billion in sales a year, and the company is aiming for $10 billion through new products and new markets, such as China. The company has been paying a five cents per share dividend each quarter regularly. ...
Technical Analysis
“It is sometimes significant, but not always, when one upwardly trending moving average line crosses over another upwardly trending moving average, since it signals a price rally to come. This has happened to Corning shares twice before in the past five years, and each time, shares rallied fairly sharply. Shares look poised to experience that crossover again, with the 50-day crossing the 200-day, and while we cannot be certain a rally will occur, other technical signals indicate what could be a fortuitous convergence. Overall, we see 16 as a solid floor of support, with 20 acting as resistance. Cabot recommendation: Buy. Suggested Buy Range: 17-18.5”
Brendan Coffey, Cabot Green Investor
