Declining TV sales have made most of the investors bearish on Corning Incorporated (NYSE:GLW), the glass manufacturer. The 11% decline in the stock price in 2012 shows this well. Goldman Sachs Group, Inc. (NYSE:GS) also recently downgraded this stock. HDoes a decline in TV sales justify a short position in the stock? Or is there any growth expected in other segments that can offset this decline?
The Investment Case
Corning is our preferred pick in the Display & Lighting space. There are several industry factors that drive our positive view on the shares, including expectations for solid glass demand through 2013 fuelled in part by ongoing screen size expansion in its core LCD TV market, expectations for more moderate glass ASP declines, and secular growth in Gorilla Glass demand as a result of touch screen proliferation. Moreover, with shares trading at ~0.9 times tangible book value and providing a ~2.8% dividend yield, our outlook for $3 billion in free cash flow generation over the next two years provides valuation support.
The Business Drivers
The following chart shows Corning’s different revenue streams:
I believe Corning’s biggest competitive advantage is its expertise in specialty glass and ceramics, coupled with its manufacturing know-how, which has translated to a sustained leading market position across a variety of businesses (LCD glass, strengthened cover glass and optical fiber).
Corning’s largest segment by revenue is Display Technologies (DT) and LCD glass comes under this segment. There is no doubt that the DT segment has matured, with LCD glass’ ASP declines offsetting high-single-digit volume demand growth. However, I believe continued robust growth in the Gorilla cover glass business (I see ~15% annual revenue growth in 2013 and 2014), coupled with margin expansion across its non-LCD businesses, will at least sustain earnings through 2013 and 2014.
The rising auto SAAR bodes well for Corning’s investors and will definitely help the company to grow in the near-future. There are two reasons to believe this:
1) The Environmental Technologies (ET) segment manufactures filters for the automotive applications. With rising environmental concerns and rising US auto SAAR (which I have covered in my one of previous posts), this segment is ready to fly high.
2) The company is pushing for the use of Gorilla Glass in the cars. The glass is a scratch and impact-resistant glass that is already being used in cell phones and other gadgets.
A product of Corning’s specialty material segment, Gorilla Glass holds a promising future. This is the same glass that is being used in Nokia Corporation (ADR) (NYSE:NOK)’s Lumia 920, Apple Inc. (NASDAQ:AAPL)’s iPhone 5 and Samsung S3. The market expects strong sales for both Lumia 920 and iPhone 5. The sales for the S3 are estimated above 30 million units, worldwide.