Among electronic components distributors and manufacturers, Corning Inc. (GLW) stands out for having placed a huge bet on liquid crystal display (LCD) production. Although the firm has made an effort to diversify its production over recent years, its net income is still concentrated on their display technology segment (97% in 2010, almost 90% in 2011 and 82.28% on 2012, according to annual reports).
Despite being so dependent on American consumers (in contrast with other electronic components distributors), Corning and Samsung Corning Precision (SCP, a 50% subsidiary) have half the market share in the glass panel industry. So, in order to evaluate whether this company is worth being considered as a profitable long-term alternative or not, we should take a deep look into the LCD market, and characterize it, so as to know what we should expect from it.
LCD Industry Overview
Of course, a great bet also involves many risks. Even though LCD technology became very popular in these last few years, both in TV screens and computer monitors, we should never miss the fact that technological markets are often exposed to products becoming obsolete due to the development of new, more efficient technology. Without going any further, it’s easy to recall the plasma display panel (PDP) fiasco, an apparently promising market in the 1990s and early 2000s but quickly replaced by LCDs (by 2008 LCDs sell 21.1 million units, almost 10 times PDP sales on the same year). Even Panasonic Corporation (PCRFF) announced it will interrupt production of PDP on 2014.
Despite being a competitive market, technology shifting isn’t always so abrupt, since new developments aren’t necessarily compatible with already developed accessories, therefore implying shifting costs. Even if the LCD industry were to become stagnant as a result of technological developments, sales revenues would not be completely shattered in the short term.
Contrast with Competitors
In order to analyze Corning’s profitability, let’s take look at industry rival Furukawa Electric Co. Ltd. (FUWAY), a Japanese electronics manufacturer that distributes diversified products, from automotive components to superconductivity cables. If we take into account the earnings per share growth, Corning doesn’t look too great after taking a 3.5% dive. This is most probably due to a slowdown in sales revenues and net income in 2012.
Despite Corning’s troubled present, shareholders’ dividend yields were not affected critically. Furukawa, on the other hand, has increased its annual dividend yield rate above its historical average, demonstrating its solid market position and profitability. Current earnings and revenue stability, however, have also resulted in the Japanese giant’s stock being drastically overpriced. The 216% price premium investors must pay for Furukawa shares, relative to industry peers’ average, is simply not attractive for those seeking to make a fresh investment. Corning meanwhile is currently available at 15.1 times its trailing earnings, making it a bargain at an 18% price discount relative the industry average.
2013 demonstrated to be a more optimistic year than most had expected. Although investors Ronald Muhlenkamp (Trades, Portfolio) and Ruane Cunniff (Trades, Portfolio) sold out their positions (adding up more than 5 million shares), Ray Dalio (Trades, Portfolio) bought in more than 350,000 shares. Dodge & Cox, who added 47% of its previously owned shares in its latest transaction, brought its position to 55.47 million shares as of late June 2013.
In my opinion, Corning does seem to have become rather stagnant since 2012. Even if its sales were to keep steadily growing, there’s no telling what will occur in a high-tech market. Another critical factor concerns the huge gap between Corning’s net income during 2011 and 2012. Although revenues were higher, net income decreased from $2.6 billion to $1.9 billion, most probably due to a less operating margin in other segments the firm has tried to develop.
Overall, Corning’s focus on LCD displays has left it exposed to market uncertainties, and could very well put a huge dent into income if demand drops. With this risk in mind, and considering the firm’s diversification efforts have not been as successful as expected, I am inclined to take a bearish stance towards this stock.
Disclosure: Victor Selva holds no position in any stocks mentioned.