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Corning Beats the Street on All Fronts – Stay Long
Dear Reader,
Despite beating on all fronts and giving strong guidance, Corning’ stock sold off after the report and was weak during the day. The sell-off was due to market weakness, rather than Corning’s specific issues. It was only later in the day that buyers came in and lifted the market.
Corning immediately outperformed in the recovery.
There is no doubt that I love Corning. The company enjoys almost all the attributes that I typically look for in a company to own for the long term: long-term and expanding market dominance in all their main products, based on superior quality and efficient manufacturing. And this translates into a rock-solid balance sheet and strong cash flow, as Corning is awash with cash and keeps improving its inventory management.
Right now, we are looking at a valuation of only about 11 times expected earnings and a PEG ratio (how much we pay for this growth) slightly over 1. This is cheap. There should be an “easy” (nothing is easy these days) 25% to 35% gain on this stock in the short term and much, much more in the longer term.
A Great Quarter, Once More…Sales were strong, up 41% compared with the same quarter last year. The growth was lead by Asia, especially Japan (not a typo) and China. Just to give you magnitudes of sales increases in glass: LCD glass sales were up 45% in October and 27% in November. Japan showed 73%, 64% and 70% sales increases in the last three months. And China will deliver a 70% pick-up in sales in 2010. Wow!
This added volume helped boost gross margins 1% to 42%, and prices remained robust. Very importantly, inventories in the supply chain dropped, which means that as sales continue to increase, the chain will have to increase purchases. In the telecommunications area there were no surprises, given that this quarter is typically weak.
A very important point that I believe has not hit the analyst community, and will be waking them up over time, is the reduced seasonality of sales moving forward. It is well known that in the U.S., because of the Christmas season and the budgeting process in information technology, sales tend to peak in the last quarter. But with China and other Asian and emerging economies growing strongly within Corning’s sales mix, that seasonality will be reduced significantly.
And this reduction in seasonality will make sales growth look more sustained throughout the year. This is a huge new advantage for a tech company, and should command a premium from a price/earnings multiple standpoint, eventually. Corning will review this issue in detail and give detailed guidance on their February 5 analysts’ meeting in New York City. They hinted that guidance would be stronger. So stay tuned, because once they explain seasonality and firm up their growth outlook, I expect renewed interest in the stock.
Very importantly, Corning will be displaying new technology products for the first couple of hours of the meeting, which will bring more excitement.
Another point that appears to have gone unnoticed is the future price stability that is likely to come from a lean inventory throughout the supply chain.
Driving sales, we saw emerging markets and even the U.S. were strong, especially in the “bread and butter” glass sales, which account for some 50% of Corning’s total revenue. These are being driven higher by a very strong global demand for flat panel LCD TV sales, mainly.
Sales were helped not only by the pick-up in economic growth, especially in emerging markets, but also by the faster rate of conversion from the old CRT TVs and monitors to the new LCD TVs. The CRT industry is collapsing.
When questioned about the reasons for this migration, management ventured their multi-factor theory:
* In China, the government doubled the subsidy for appliance purchases, helping sales.
* The migration is also helped by the conversion to digital in the U.S. and by the superiority of the LCD product over the CRT.
* There is more consciousness about the lower power consumption of LCD screens.
* In Japan, it seems awkward that the country that led the way in LCD TVs and PC monitors is seeing such growth. Corning’s speculation on Japan’s LCD remarkable strength is that today’s LCD screens are far better than their predecessor products of five years ago. And the price points are much lower, too, given the large increases in production and drop in production costs.
In the information technology sector, sales of glass for computer monitors and laptop screens are up some 15%. Their glass venture with Samsung (Samsung Corning) is operating at near full capacity, so the outlook there will be slightly higher for 2010. The “killer app” of mobile phones – touch screens – is lifting Corning’s Gorilla glass sales. The latter, while very small today, should show strong growth, since they are featured already in 65 products.
As if all those positives were not enough, their cost structure remains consistent with past quarters, with no excesses, and the tax bite will come down by 10%.
All in all, an outstanding quarter… sure to be followed by an even better 2010, as we will learn on February 5.
Now I am off to review the IMF’s World Economic Report, which upgraded 2010 global growth in all major countries.
Also, I already saw a couple of juicy opportunities that I need to explore in detail for you. No need to jump the gun. Today’s Fed statement should be more of the same: a warning about some removal of liquidity in the future and remaining easy on rates for a long time.
We will see.
Finally, we need to also stay alert as to new Obama initiatives in his State of the Union address, the expected Bernanke confirmation in the Senate (market positive), fourth-quarter GDP on Friday (should be market positive), and a weak labor picture on February 5.
Stay tuned…
Enjoy and profit,
Horacio Marquez
