Time to Start Nibbling on Corning
The time has come to start nibbling on some savory stocks trading at ridiculously low prices and valuations. One well run company that has been on my radar for quite some time and is definitely trading as if there was no tomorrow is Corning Incorporated (GLW). Corning has been trading at quite a discount to its true value for quite some time, but given the current market conditions, I demanded an extra margin of safety. That opportunity came on October 30th, as Corning came within about 5% of its 5 year low and I bought in at $10.06 / share.
Of course, there are good reasons why this great company is trading at a prior 12 month P/E of less than 3 days after reporting impressive third quarter results. But, just as certainly, these reasons are overblown.
Some background, first. Corning is an amazingly agile 157 year old company that most of us still remember as brand name housewares low tech company that during the last recession seemed destined to go out of business. Today's Corning is that no more, but a completely transformed high tech powerhouse, a leading maker of glass substrates used by the electronics industry and fiber optic equipment used by the telecommunications industry, with an important environmental technologies business, a profitable life sciences business, as well as additional small, but promising businesses.
So, why the scare? Well, most recently, more than 50% of Corning's profits have come from the highly profitable display technologies business - that's the glass substrates that Corning sells to mostly Korean manufacturers of LCD panels that go into TVs, monitors and notebook computers. And this happens to be Corning's most at risk business, as the world gazes into the abyss of potentially the worst worldwide recession in modern times.
However, on the bright side, we have the mitigating factors.
Demand for LCDs is unlikely to suffer significant setbacks for several reasons:
- The switch to digital TV in the US is coming in February of 2009 and there are plenty of people who are yet to upgrade their sets to LCD TVs. There are also those who will try converter boxes first, get disappointed and upgrade to the real thing.
- LCD displays use far less electricity than do other technologies and especially the CRTs. As electricity becomes more expensive, upgrades to LCDs become no-brainers in a variety of heavy use environments.
- No matter what the economy, people still need to take their minds of things, be entertained and feel like kings. This is why movie theaters did so well in the US during the Great Depression. As costs of LCD TVs have come down drastically over the past several years, large panel LCDs are starting to fill this affordable luxury niche. Consider that the latest and greatest 42" LCD TV can now be had for around $800 on sale, which is less than the cost of taking an average family out to the movies twice a month for a year.
- Corning is the largest and lowest cost manufacturer of the glass substrates that get assembled into LCD displays.
The good news doesn't stop there, either. Corning's second largest business - fiber optics - is doing well and is unlikely to suffer in the current economic climate. Its environmental business has a very important and exclusive pollution reduction technology used in automotive industry. The company is also in good financial shape with more than $2 / share in cash equivalents and low and declining debt. Corning is one company that is well positioned to not only weather the storm, but come out stronger, as weaker competitors fall by the wayside.
Stock position: Long GLW.
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This article has 7 comments:
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skwestorange
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43 Comments
Nov 03 07:07 AM-
Jake Berzon
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53 Comments
My Website
Nov 03 08:22 AMOn Nov 03 07:07 AM skwestorange wrote:
> This article could be strengthened with a discussion of expectations
> for revenue, earnings and and margins in the three businesses cited.
> The qualitative discussion does not provide any objective support
> for the contention that GLW is undervalued and could be bought here.
> Further the article itself lays out the case for margin compression.
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daltxfan
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1 Comment
Nov 03 11:15 AMBut as we all know, in last downturn, Corning stock hits a $1. Why this time you think it can't go lower than $10?
On Nov 03 08:22 AM Jake Berzon wrote:
> You have valid criticisms. My contention is that the margin compression
> currently built into the stock price is much greater than reasonable.
> I expect Corning to handily beat its lowest 2009 earnings expectation
> of $1.30 and trade at a P/E of 12 or better once markets stabilize
> (i.e. at least 50% upside from my purchase price).
>
> On Nov 03 07:07 AM skwestorange wrote:
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JackaLoupe
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3 Comments
Nov 03 11:56 AMAnd can a resurgance of Deisel motors be far behind...
BTW, anyone who types "P/E of 3 days" (should've inserted "just" after '3') isn't even paying attention to his own "production.
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Undercat
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3 Comments
Nov 10 01:44 AM-
Jake Berzon
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53 Comments
My Website
Nov 10 10:12 AM> I am a big fan of Corning as well and have been holding their stocks
> for a while.
>
> But as we all know, in last downturn, Corning stock hits a $1. Why
> this time you think it can't go lower than $10?
>
I agree that this may not be the lowest bottom of this market and that stocks could head lower from here. I also agree that GLW may go lower with the market. However, you must also consider that in 2002, when it traded at a low of $1.1, GLW was a much different business than it is today, both in volume and in product diversity. For example, 6 years ago, LCD TVs, were barely a factor for glass substrate demand. Today, they account for half of it and this isn't going to go away! Going into the last bear market, Corning was a growth story and trading at exorbitant valuations. This time around, it is a classic value play. It's in a much better position from the point of view of debt and profitability, as well and look at it's tangible book value. Can its stock drop further? Sure. Will it go to $1? There are certainly people out there looking at the charts and thinking about it. From the fundamentals view point, it is highly unlikely, though.
On Nov 03 11:56 AM JackaLoupe wrote:
> How out-of-it do you have to be to characterize Corning--the inventor
> of FiberOptics that rode that wave of cross-country (and ocean) laying
> of cable a decade ago--as so-called "low tech" company about to go
> out of business? He must be confusing the company with the stock--while,
> moreover, remaining clueless over the rest of Corning's business.
Try reading my blog more carefully. I characterized Corning as "Corning is an amazingly agile 157 year old company that most of us still remember as brand name housewares low tech company that during the last recession seemed destined to go out of business. Today's Corning is that no more, but a completely transformed high tech powerhouse, a leading maker of glass substrates used by the electronics industry and fiber optic equipment used by the telecommunications industry, with an important environmental technologies business, a profitable life sciences business, as well as additional small, but promising businesses."
It is a former low tech cookware company. It brilliantly transformed itself into a high tech company. Following that transformation it lost money for almost 4 straight years and certainly in 2002 was looking destined to go out of business, trading as low as $1.1/share. So, what's your beef?
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drbob66
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26 Comments
Nov 22 08:04 AM