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Corning completes its comeback
After the Internet bubble burst, Corning struggled. Now, demand is soaring for its flat-panel glass and telecom companies are again buying its fiber optics.
By Robert Walberg
Welcome to Corning's world:- It's got half the market for the glass used in flat-panel televisions, a market that's only just begun to hum.
- It's got a resurgent business in fiber optics that will deliver super-fast Internet, video and phone service to homes.
- And it's got the technology that could unlock a $1 billion market helping diesel engine makers meet tough new emissions standards.
Since Corning (GLW, news, msgs) started as a glass company more than 100 years ago, it seems only fitting that we begin our review of the business by focusing on the explosive potential for its display technologies unit.
Though Corning has been providing glass substrates for liquid-crystal displays for years -- mainly for desktop and notebook computers -- it's the growing demand for high-definition flat-panel television sets that has investors once again excited about the company's future.
Sitting pretty
You don't have to be an expert in glass to know that the company is sitting pretty. All you need to do is walk into any Best Buy (BBY, news, msgs) or Circuit City Stores (CC, news, msgs) location and look at the huge displays of LCD-TVs. With flat-panel TV prices falling, demand is only going to rise, and that's very good news for Corning's bottom line.
Corning recently announced that it expects its glass business to post 10% to 20% sequential growth in the second quarter. Overall, the company sees its LCD glass-unit volume growing by more than 50% this year, as flat-panel TVs reach 10% market penetration. That's right: 10% penetration. This market is just beginning to heat up, with a future as bright as the images on that big flat-panel, high-def TV. In fact, Corning sees worldwide demand for flat-panel glass tripling over the next four years.
Wall Street wouldn't be Wall Street if it didn't worry about something, and with Corning the concern is that as the manufacturers of flat-panel sets lower prices, the prices paid for components also must fall, pressuring Corning's margins and profits. But while prices are almost certain to decline, volume growth and cost controls should more than offset the pressure on margins and profits.
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Another one of Wall Street's long-time concerns has been the glut of fiber in the marketplace. With the Internet boom in the 1990s came explosive demand for optical fiber, which helped catapult Corning's sales to more than $7 billion in 2000. But a glut of long-haul fiber -- cables that connect city to city or country to country -- ensued and demand shriveled up. (The company, which invented optical fiber for communications more than 30 years ago, had revenue of $3.85 billion last year.)
A recent Wall Street Journal article noted that 85% of long-haul fiber remains dark, or unused. But what often gets overlooked in the discussion of fiber optics is the growing demand for fiber to the home.
The road home
Telecom providers such as Verizon Communications (VZ, news, msgs) are once again buying fiber to run to their customers' homes so that they can bundle high-speed Internet access, video and voice-over-Internet services. Fiber to the home provides numerous advantages over more traditional connectivity services such as DSL, cable modem or wireless. Not only is it hundreds of times faster, but its virtually unlimited bandwidth makes file sharing, online gaming and voice over Internet run smoothly. It also opens the door to video on demand. And it's a much more secure network.
Again, costs are a factor, but with the major telecom providers seeking ways to keep customers in an intensely competitive environment, the added benefits of fiber-to-the-home service suggest that Corning's fiber business is, well, back in business. Considering that the company's telecom unit accounts for about 40% of total sales, that's good news indeed.
Though the company's environmental-technologies unit is much smaller than either telecommunications or display technologies, it's on the threshold of exciting growth. Those tighter emission standards set to begin in the United States in 2007 have driven diesel engine manufacturers to seek ways to reduce the amount of harmful gases and soot emitted into the air from their products. Enter Corning and its diesel substrates and filters.
Corning's diesel-products sales totaled about $12 million in 2001 and remained essentially flat for the next few years. However, diesel-product sales surged to more than $20 million in the first quarter. Bolstered by the strength of its diesel products, the environmental technologies unit enjoyed sequential revenue growth in the first quarter of 14%. With the company poised to finalize deals with a few domestic heavy-duty diesel engine manufacturers, and with Europe and Asia ready to adopt similar emission standards, growth in this segment is likely to continue for several quarters.
Paying a debt
Another favorable trend is taking place at Corning, and that is debt reduction. Management expects to bring total debt below $2 billion by year end from $2.7 billion a year ago. The improvement in Corning's balance sheet hasn't gone unnoticed as the company's credit rating was recently upgraded to investment grade, with a stable outlook by Standard & Poor's and Fitch.
If it's true that the trend is your friend, then the trends at Corning are very friendly indeed. Debt is coming way down, and three of its product lines are poised to deliver exciting growth for years to come. With the stock trading at 21.2 times and 18.2 times estimated 2005 and 2006 earnings, respectively, and with a long-term growth rate of 20%, Corning is also a reasonably good value relative to its peers and the market.
Add it all together, and Corning's glass isn't half-full, but downright overflowing. For growth-oriented investors, Corning is a compelling investment candidate with intermediate- to long-term potential to $20 to $21 a share.
Stock recommendations
With this column, Ill add a buy on Corning (GLW, news, msgs) to my Street Patrol portfolio for tracking in our stock recommendations section, and Ill report back in a few months on how its done.
At the time of publication, Robert Walberg neither owned nor controlled shares in any equities mentioned in this column.
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