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Technology Improvements Are No Match for the Recession
Posted by: Vanin Aegea (IP Logged)
Date: October 4, 2013 10:05PM
The electronic components industry is one of the many industries hit by the economic recession. Growth for the short- and mid-term is very well limited by smaller disposable incomes. With a recovering economy, and the introduction of new technologies during the last decade, prospects for Emerson Electric (EMR) and Corning (GLW) defy a weak environment. Whether profits are on the way is the subject at hand. Let’s take a closer look.
Growth in All Segments
Corning´s 2013 second quarter report showed important improving signs with sales and earnings per share increased 11% and 23% correspondingly. Further, CEO Wendell Weeks explained: “For the past 18 months, we have effectively managed our cost structure, brought stability to our LCD glass business, returned to earnings growth, and advanced our new-product portfolio. So, the last quarter represents a positive trend for the company, and fuels hopes for a prosper future”. However, the third quarter for the same year undressed some shortcoming related to soft demand for TVs.
Prospects for Corning are fed by several catalysts at different levels. For example, Obama´s announcement for cash repatriation enticements is expected to translate into tax benefits. Additionally, data centers continue to increase the utilization of the fiber optic solutions developed by the firm. The company also collaborated with Avago Technologies to develop new and more flexible optical cabling solutions. Such strategy has increased potential profits and recovered core segments’ performance.
Corning´s specialty products, display technologies, and environmental technologies segments will receive an additional push. The first segment is expected to see an increase for the demand of the Gorilla Glass for touchscreen devices. Also, the introduction of the generation 10 glass substrate will fit perfectly with the growing demand for 40 inches and larger LCD TVs. Last, rising concerns for fuel consumption led the company to develop products for the engine industry compliant with the highest standard. And they’re expected to be the first to introduce products consistent with new European regulation, improving the company's competitiveness.
Financially, Corning is very strong. Trading at 11.1 times its earnings, packing a 50% discount to the industry average, the stock is undervalued. I share the optimism displayed by Dodge & Cox, the largest fund investing in the company, because all segments present growth opportunities and the balance sheet remains clean after the recession.
Mixed Results Are Not Enough
As confirmed by the reports for the second and third quarter in 2013, Emerson Energy´s growth performance is unstable. The company explained the current situation by saying that “net sales for the third quarter ended June 30, 2013 decreased 2 percent from the prior year…reflecting a sluggish economic environment and difficult comparisons, as recovery from the Thailand flooding drove robust third quarter sales in the prior year”. However, solid operational execution and returns from the restructuring investments led to the overall growth of the company.
On the upside, positive future prospects for Emerson Energy are fed by a year-over-year rising order book. Additionally, the sale of 51% stake of its computing and power business gave the firm a new push. Such a move will allow the company to improve future performance by easing the load represented by lagging segments. At the same time, the cash inflow allowed the company to accomplish new acquisitions: Enardo, a maker of safety equipment for the oil and gas industry, and Virgo Valves, a leading manufacturer of Ball Valves and Automation systems.
On the down side, Emerson Energy´s world operations have exposed the firm to highly cyclical end markets. This adds a great uncertainty over how the model will respond to abrupt margins swings. Additionally, growth for the network power segment is not expected, as sales continue stagnant at 2012 levels. Also, a lagging European and slower Chinese economy will continue to adversely affect currency exchanges.
Financially, Emerson Energy is moderate to good, as debt continues to decline. Trading at 31 times its earnings, carrying a 40% premium to the industry average, the stock is overvalued. Despite the premium, and James Barrow´s increasing position, I remain doubtful because the company is moving away from electronics and reinforcing the oil & gas segment, while impact on performance is yet to be fully assessed.
The reason for choosing Corning over Emerson Energy lies in the presence of growth catalysts for all segments. Also, its balance sheet is the strongest and R&D has so far paid off. The introduction of Gorilla Glass and generation 10 glass substrate have shown to adjust to emerging market preferences, and offer great opportunities for profit.
Disclosure: Vanina Egea holds no position in any of the mentioned stocks.
Guru Discussed: Dodge & Cox: Current Portfolio, Stock Picks
Stocks Discussed: EMR, GLW,