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- Corning (GLW, Financial) has had very disappointing LCD sales
- Financial growth has not translated into price growth
- Great for consumers but a long term value trap for investors
Corning has been around for 160 years and today its Gorilla Glass covers the front of practically every high-end smartphone and tablet on the planet as well as the LCDs found in computer monitors, flat-panel televisions, and other smaller consumer electronics devices.
By many measures Corning is a value bargain at this price, which is likely why so many guru investors have piled into it as the roster reads like attendees at a Value Conference:
- Brian Rogers (Trades, Portfolio) owns 12,000,000 shares
- Yacktman Fund (Trades, Portfolio) owns 2,810,000 shares
- Joel Greenblatt (Trades, Portfolio) owns 2,094,002 shares
- Dodge & Cox owns 55,821,375 shares
- HOTCHKIS & WILEY owns 24,244,934 shares
- Mario Gabelli (Trades, Portfolio) owns 713,766 shares
- Charles Brandes (Trades, Portfolio) owns 6,776,941 shares
- David Dreman (Trades, Portfolio) owns 75,697 shares
- Donald Yacktman (Trades, Portfolio) owns 3,582,997 shares
- Robert Olstein (Trades, Portfolio) owns 240,000 shares
- Richard Pzena (Trades, Portfolio) owns 7,724,858 shares
Apple & Corning
In 2006, as Steve Jobs began looking for a glass manufacturer for the iPhone, he spoke with Corning’s young CEO, Wendell Weeks, who told the Apple (AAPL, Financial) CEO that Corning wouldn’t be able to make the kind of type of material Jobs sought. Jobs persisted and less than six months later, Corning was in the Gorilla Glass business.
This relationships has helped Corning achieve consistent growth over the last decade with revenue up 112%, net income up 322%, and book value up 348%. Here’s a snapshot.
In 2005
Sales: $4.5 billion
Profit: $585 million
Book: $3.40
ROE: 11.2%
Today
Sales: $9.5 billion
Profit: $2.9 million
Book: $15.10
ROE: 11.3%
From then until now, the company has used this relationship to generate over $24 billion in net earnings, roughly the same figure as its current market cap, yet the stock flatlined.
Stock closed at $19.05 July 29, 2005
Stock currently trades at $18.80
Even with all this good stuff, the stock is a dog
However, when you judge the economic value produced by GLW the stock, Corning is more on the corny side than the value one.
In the last 10 years, you basically paid out more in taxes on the dividends received than you produced in capital growth. Why? Because while the demand of electronics using LCD glass has increased, Corning operates in a highly competitive market where it must constantly stay on the cutting edge and where new technology could shift the entire industry on a whim.
Just look at what happened in 2014 when GT Technologies was reported to replace Corning, before filing Chapter 11 bankruptcy protection in October. No threat of GLW going bankrupt as the company boasts a solid $5.1 billion in cash and just $3 billion in total debt.
Corning has continued to strengthen its position via acquisitions, one being Samsung Corning Precision (completed in early 2014) which will enable the firm to fully align its global manufacturing capacity and take full control over product development. The company’s technology portfolio and manufacturing capabilities should allow it to remain the leading supplier in the industry and highly profitable for years to come.
But so what?
Corning could keep the leadership position in the LCD business for the rest of eternity and continue to pound out cash and still not produce better overall performance the S&P 500. Sure, you’ll see pops here and there, but the bear market is coming, and this is one stock that should be avoided, despite over $1 billion of guru money and a low earnings multiple.
To justify ownership, the company would need to meet baseline growth targets that translate into a $37 share price by 2020 and $75 a share by 2025. We are already in the midst of a long standing bull market, which should have pushed GLW up to these levels already. The future won’t see it grow as the market declines.
