By Ryan Barnes. Edited By Douglas A. McIntyre
Corning, Inc. (GLW)
Corning is the world’s largest producer of specialty glass products, the most popular use of which is in the guts of the LCD monitors and televisions that are just now hitting the vertical part of the growth curve, growing in excess of 30% per year. Yes, prices are falling, but Corning has a nice moat in the fact that they make the product better and cheaper than anyone else, and by any measure. The competition (all foreign companies) have caught up in some of the lower-margin areas of LCD glass production, but Corning still runs the show in overall market share (60%) and is able to spend a lot more on R&D than the others, so their odds of at least maintaining the top spot for a long time are pretty solid. Corning also has to fight against the inevitable price declines seen in any consumer technology these days, but so far they’ve been able to keep margins steady in the face of this through impressive cost reductions. GLW kept margins flat last year in the face of a 10% price drop, and they’re becoming very keen on inventory management, a lesson well-learned after the fiasco the company faced during the 2000-2002 years when fiber optic cable was laid all over (and under) the world only to find that nobody was ready for it.
Corning has four operating segments: the aforementioned Display Technologies (LCD), Telecommunications (fiber optic), Environmental Technologies, and Life Sciences. The latter two are currently break-even businesses, but both have strong growth potential, especially in the environmental group where new regulations are requiring that diesel engine-based trucks be outfitted with a new filter that only Corning provides. This group will be profitable very soon, but for now we’re giving them no value in our calculations, as the segments will have to prove themselves before being salable or “spinnable” to the public.
Corning also has two equity ventures that are 50/50 splits with Samsung and Dow, both of which produce display glass. Giving both ventures the same multiple as the stock market is giving GLW in total (of which the display group provides all the current earnings), they are worth nearly $10b combined.
The one drag on Corning’s stock – and the best explanation for the low current valuation outside of LCD cyclicality – is the 25m shares that are essentially in escrow as an asbestos settlement from 2003. The shares will be given away in 2009 and whatever market value they have at that point will be a current liability to the company. For the sake of extreme conservatism, we’re going to shoot for the moon and value the GLW shares at $2b, which amounts to $80/share in three years. That should take care of the most pessimistic investors’ qualms, and clearing that trash out of the way, the total breakup value for Corning comes to an impressive $35/share – with any profitability in the environmental and life sciences groups being a great kicker to boot.
Ryan Barnes
Ryan Barnes has over 10 years’ experience in portfolio management and investment research, covering equities, fixed income, and derivative products. Ryan spent the past 5 years working as an institutional trader & manager for high-net worth investors, working with Merrill Lynch, Charles Schwab, Morgan Stanley, and many others. Ryan is currently working as a writer and financial modeling consultant on hedging and capital appreciation strategies, and does not own securities in the companies being covered.
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