Date: 31 January 2012
In 1879, Thomas Edison asked Corning to produce bulbs for his invention, the incandescent light. After World War II, the company began producing the glass bulbs for televisions on a mass scale, making them affordable for families across America. At around this time, Corning formed a venture with Dow Chemical (DOW) to start Dow Corning, a company focused on the production of silicone which to this day produces approximately $5 billion in annual revenue.
In 1957, the company expanded its focus into kitchen plates and started the Corning Ware brand, known for its durability. In what would eventually lead to the company´s market value surpassing $100 billion in 2000, Corning scientists developed leading edge fiber optics in 1970, which helped launch a new digital age into U.S. households. Also in the 1970´s, the company developed a technology to reduce hydrocarbon emissions from vehicles by 95%. The product the company is most notably known among investors is its high quality flat LCD glass in the 1980s.
Currently, the company´s main product categories are display, telecommunications, environmental technologies, life sciences, specialty materials and silicone via its joint venture in Dow Corning. In 2011, all of the company´s segments grew revenue greater than 15% except for display, which accounts for 40% of sales and grew 4%. Investors are keenly focused on the pricing pressures that exist in the display market. While the company anticipated volume to be up in Display more than 10% in 2012, it stated pricing pressure would remain at least through the first quarter.
Before the holiday season started, management anticipated that consumers would be purchasing higher end TVs, which would have led to a stable pricing environment. However, while consumers purchased display related technologies this holiday season, they proved to be price conscious, resulting in a disappointing quarter for Corning. Investors should always be keenly aware of risks in the companies that they invest in. However, in this case, I think that investors and analysts are not giving Corning nearly enough credit for the breadth of their product portfolio and the strength of its balance sheet.
In its most recent call, management stated that it expects growth from all of its product categories except for display in 2012. In display, while the company wouldn´t give precise guidance, management stated that the segment will be stable beginning in the back half of 2012 and that it will continue to provide a significant amount of free cash flow. The company participates on a global basis in its businesses and expects continued growth in its end markets for the foreseeable future.
Looking at the company´s balance sheet, the company currently sits on a record $3.25 billion in net cash and trades at 1x tangible book value, the bottom of its historical range as pictured above. In 2011, the company announced a $1.5 billion buyback, the first significant buyback over the past 20 years. Additionally, the dividend was boosted and sits at over a 2% yield.
Management can use the more than $2 billion in expected free cash flow in 2012 to pay for both of these programs without dipping into the cash on its balance sheet. The company has built its tangible book value significantly over the past 10 years, putting it in an enviable position to make a large and accretive strategic transaction. Currently, if you remove cash from the stock price, shares trade at 7x earnings and cash flow, significantly below its diversified industrial peers. We argue that the company´s ability to make a large transaction to boost growth prospects, in combination with the appealing valuation, make Corning a good long term investment.
Add new comment