Will Gorilla Make Corning King Of The Jungle?

By Stephen D. Simpson, CFA | November 03, 2010 AAA

There have been a few times during Corning's (NYSE:GLW) history where it seemed like the company could not buy a break. No company had more share of the telecom-fueled fiber boom of the late 90's, but Corning had little to show for it when capex demands sucked away the cash. With the advent of LCD panels everywhere, it looked like Corning might be in a for a second act - a boom in demand coupled with a loud sucking sound from the cash flow statement. With the LCD revolution seemingly here to stay, though, and the emergence of Gorilla Glass, could Corning finally have a more stable configuration?

IN PICTURES: 5 Tips To Reading The Balance Sheet

The Quarter Was What They Thought It Was
Corning delivered a third quarter performance that was inline with the company's earlier (negative) pre-announcement. Sales fell 6% on a sequential basis, though they were up 8% versus last year's level. This drop was led entirely by the company's display business (which is close to half of sales) - sales here fell 23% from the second quarter, while the other segments mostly showed decent growth.

Below the top line, the news was similarly mixed. Gross margin fell close to 3% sequentially, as lower LCD volumes did some damage. Once again there was a dichotomy between the sequential and annual performance - the company saw operating income grow almost 40% on an annual basis, but fall almost a quarter sequentially.

The Road Ahead
A sizable jump in sequential inventory levels might worry some observers, but it seems normal going into a holiday season. Then again, the company's guidance suggests that volumes and pricing are going to be down a bit more on a sequential basis, so maybe it is a reason for concern. Ultimately, Corning is just the first step in a long chain - Corning sells its glass to panel-makers like AU Optronics (NYSE:AUO), who then sell on to monitor and TV-makers like Dell (Nasdaq:DELL) and Sony (NYSE:SNE) and then on to retailers like Best Buy (NYSE:BBY) and Amazon (Nasdaq:AMZN). So when it comes to the health of the display business, there really is not a whole lot that Corning can do to make things better in the short run.

What Corning has done, though, is develop products that can help achieve some differentiation. Gorilla Glass is a scratch-and-break resistant glass that is seeing a strong uptake as a cover material for smartphones, tablets, laptops, and TV's. Customers like Apple (Nasdaq:AAPL), Motorola (NYSE:MOT) and Dell have already signed on and this product should be a major contributor for Corning - at least until a rival comes out with its own iteration. (For more, see Tech Stocks That Offer The Best Of Both Worlds.)

The Bottom Line
Corning has the decided misfortune to be in a difficult business with seemingly endless capex requirements. What that means for investors is that this is a better candidate for a torrid affair than a long-term relationship. Corning is a fine stock to buy when the sector has been savaged, but it often trades back up beyond a level that can be supported by long-term free cash flow production.

Such would seem to be the case again today. Gorilla Glass seems like a great product and the LCD business is no flash in the pan. That said, investors have to be willing to project a minimum of low-teens compounded free cash flow growth for the next decade to achieve a price target that would be 10% higher than today's prices. That is a very high hurdle for a company at Corning's stage of evolution, and a goal that does not seem easy to achieve. (For related reading, check out Is Carlyle Looking At The Next Fiber Gold Rush?)

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