In stock parlance, critical mass is a beautiful thing. It's that point when a new technology or product goes from having "strong growth trends" to being ubiquitous in the market. Corning (NYSE:GLW) provides the backbone of a critical mass technology, the LCD flat screens used in TVs, monitors, notebooks and other mobile devices.
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Corning reported earnings on Monday, and starting from the top line, total sales were $1.48 billion, down 5% from year-ago levels, but up 50% from the March quarter when revenue bottomed at $989 million. (For more, see Earnings: Quality Means Everything.)
Net earnings (ex-items) was $654 million in the third quarter versus $614 million in the second quarter, good for a 6.5% sequential rise, but still down nearly 9% year-over-year. Gross margins came in at a strong 41%, with most of that strength coming from the display segment.
All four of Corning's business segments saw sequential growth over the second quarter. Display technologies - by far Corning's most important earnings driver - is served by both wholly-owned manufacturing and a joint venture with Samsung. When combined, they contribute over 40% to company revenues and generate over 90% of net income. Corning's other JV is with Dow Chemical (NYSE:DOW), which provided equity earnings that were up 59% sequentially at $92 million on $1.4 billion in sales.
The environmental technologies segment, which provides pollution-limiting retrofits for industrial automobiles, saw a 27% growth in sequential sales to $167 million, due to stronger sales in North America, China, and Germany.
Corning's life sciences division, boosted by the recent $410 million acquisition of Axygen Bioscience, serves laboratory testing and drug discovery efforts. Sales in this segment were up 13% sequentially to $92 million. (For more, check out Core Earnings Measure Up.)
Corning's telecommunications segment produces and distributes fiber optic cable & network equipment. Sales were $450 million in the third quarter, up 3% sequentially. Fiber optic sales were strong in China and private network sales were strong in North America, but the recession has dampened demand for fiber-in-the-home networks, as evidenced by recent commentary from Verizon (NYSE:VZ) regarding lower new adds to its FIOS fiber service than in prior quarters.
CEO Wendell Weeks commented on the conference call that sales of LCD TVs were very robust in China during the recent Golden Week holiday, and for the year, sales are up over 65% in China and 42% in Japan. He also noted that inventory levels across the supply chain were in line with expected demand, and as a result, glass-panel pricing should remain flat to slightly down in the fourth quarter.
Corning is now predicting the 2010 glass market to be 2.7 square feet of production, or a 15% rise from 2009 levels. It anticipates worldwide LCD TV sales to be up 20% in 2010, with moderate growth in the U.S. and stronger growth overseas. Because of the revenue mix that Corning sees, look for future earnings boosts if the U.S. dollar stays low throughout the next few quarters.
Valuation on Tech
The tech sector has been the place to be for investors this year, as most indexes and tracking ETFs are up in the range of 50-60%. One of the main reasons tech has bounced back so well is because it's been through a recession before. The recession of 2000-2001 was all about technology, and any company that made it out of that recession learned some valuable lessons. This is why so many tech companies have strong balance sheets and high cash levels these days - the "Great Purge" of 2001 did a lot to set up tech for the run we're seeing today. Given that enterprise spending still has yet to pick up meaningfully, I see no reason to not keep overweighting the tech sector heading into 2010. (For more, check out The Impact Of Recession On Businesses.)
As for Corning shares, last year during the market collapse GLW shares hit a low of $8.04, with the stock actually putting in a bottom before the market's March 2009 low. As for the year, Corning had been outperforming the Technology SPDR ETF (NYSE:XLK) by a fair margin until late summer, when GLW shares hit a wall around $16.50 before dropping down below $15. The stock is still up 53% YTD, crushing the 32% gain in the tech-heavy NASDAQ, yet still trades for a much lower valuation (15x trailing earnings, 12x forward) than you'll find nearly anywhere in tech, while sporting a largely un-levered balance sheet.
Outlook for Consumer Tech
With Corning glass in so many consumer technology products, the company is a good barometer for holiday spending demand. Judging from the commentary on the conference call, the inventories at retailers like Best Buy (NYSE:BBY) should be sufficient to meet demand. There won't be any huge pull back, but if the retail side does surprise, it'd be good to take a look at Corning. (For more, check out Battered Stocks That Bounce Back.)
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