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Is it Time to Bail Out on Corning?

June 27, 2014 | About:

Specialty glasses maker Corning (NYSE:GLW) has had a patchy year so far. Its shares are up just under 8% and it is trading very close to its 52-week high. So, investors must be thinking whether Corning is still worth holding or is it a sell, especially as it comes under competition from the likes of GT Advanced Technologies (GTAT) for its Apple (NASDAQ:AAPL) account? Let's find out.

Weakness Creeps In

Corning's management is quite satisfied with the company's performance, as its numbers in the recent fourth quarter were up to expectations. Corning's sales were driven by record sales in display and high demand for LCD glasses due to an increase in retail demand for larger televisions. However, going forward, management expects that there will be considerable decline in LCD prices.

So, it was not surprising that Corning's gross margin fell below expectations. It was on account of lower volumes sold for gorilla glass. This was a troubled nerve for the glass maker throughout the year, and the same is expected to continue in the future as rival GT Advanced Technologies brings sapphire crystal display to the market and hurts Corning's business.

A Big, Big Threat

Although it hasn't been confirmed that Apple's new iPhone 6 will come with a sapphire display, many reputed sources like [url="]Forbes[/url] and [url="]Canaccord[/url] are confident that the next version of the iPhone will have sapphire in it. Apple dumping the Gorilla Glass in favor of sapphire crystal display can be a disaster for Corning and the company is clearly nervous about it. Tony Tripney, a senior VP at Corning, recently launched a blistering attack on the prospects of sapphire. He touted Gorilla Glass as the best and made the following claims as to why it is better than sapphire.

· Sapphire is about 10 times more expensive than Gorilla Glass slates.

· Sapphire is about 1.6 times heavier than Gorilla Glass.

· Sapphire transmits less light than Gorilla Glass.

· Sapphire is so hard that manufacturing proper screens out of it requires pricey machines.

· Gorilla Glass can take 2.5 times as much pressure as a sapphire screen before breaking.

· Sapphire display will shatter easily as compared to Gorilla Glass.

This clearly confirms that Corning is really worried about losing Apple, especially when you consider the fact that most of these statements are ambiguous. Corning's last-ditched attempt to convince Apple had desperation written all over it as most of these claims can be proved wrong.

Busting The Myths

Tripney is basing his argument on the fact that phones will only have sapphire as the sole protective glass; however, that's not the case. The truth is that the iPhone 6 display will not be purely sapphire as Apple has already patented a technique which involves fusing a thin sapphire laminate sheet with cover glass. This is where GT Advanced Technologies, Apple's sapphire partner, comes into play. GT Advanced Technologies [url="]acquired[/url] Twin Creek during the end of 2012 and it developed a process called ion cannon technology which is capable of producing sheets of sapphire thinner than human hair. This means that Apple will not have to manufacture pure sapphire displays for the iPhone 6, and this automatically disproves point 1, 2 and 3.

Furthermore, the [url="]estimated[/url] cost for an iPhone sized sapphire screen lies in the range of $9 to $12, which isn't "10 times" more expensive than a similar Gorilla Glass which [url="]costs[/url] a little less than $3.

Moving on, due to Apple's economies of scale, manufacturing sapphire will not be as expensive. This again negates point 1 and point 4 as well. With the increase in production and advancement in technologies, the cost will come down further in the future. Moreover, since Apple has a very loyal fan base, it can easily increase the price of the iPhone 6 by a few dollars to make up for the increased cost without having a negative impact on the sales.

The last two points comes down to personal preferences. People who are careful and rarely drop their phones will prefer sapphire display because of its scratch-resistant abilities, while people who drop their phones will prefer Gorilla Glass. Further, scratches weaken the phone's screen and a scratched screen is more prone to breaking, which sort of goes against Tripney's last 2 points as well.

The Bottom Line

So, at its 52-week high, I think it would be a good idea to bail on Corning. The stock has delivered a solid return of close to 50% over the last year to investors, but I think that the advent of new technologies will lead to weakness in its business in the future, making it a sell candidate.

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