Corning: This Glass is Far From Brittle

April 29, 2017

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By IntrinsicValueFormula. Originally published at ValueWalk.

One of the first stocks I purchased using my new found value investing philosophies was Corning (GLW). It was the perfect vehicle for value investing with a low P/E, extremely low debt, and a great balance sheet. When I discovered the company in my weekly screening process, it jumped out +99at me as a possible candidate, and as I did more investigation, it quickly became apparent that this “boring glass company” could be the right fit.

As I dug into it more, I thought this would make Benjamin Graham proud, and were the perfect vehicle for my further exploration of the principles that make value investing so great. My valuations of the company at the time of my first purchase in 2012 still hold up today and is such a great buy for long-term investors.

There a lot of great things going on with this company that we will dig into further and the continuing dividend and share buybacks have added even more value to the shareholders.

Business Overview

Corning can trace their beginnings to a glass factory established in 1851. Talk about longevity; they have been a leader in specialty glass for more than 165 years.

They are based out of Corning, New York and currently have approximately 40,000 people employed with them worldwide, speaking of global they have plants in 17 countries.

Corning offers investors five reportable segments that the business is broken up into.

They are:

Display Technologies – which manufactures glass substrates for liquid crystal displays or LCDs that are used primarily in TVs, computers, and notebooks. This segment comprises 34% of Corning’s sales for 2016.
Optical Communications – This segment produces optical fiber, cable, and connectivity solutions, and is broken up into two main product groupings – carrier networks and enterprise networks. Also, this segment contributes to consumer electronic devices or cell phones. This segment provides 32% of Corning’s sales in 2016
Environmental Technologies – The focus of this segment is ceramic substrates and filter products for emissions controls in cars. This segment contributes 11% of Corning’s sales in 2016.
Specialty Materials Segment – This segment produces among other things glass ceramics used in display optics and semiconductor optics. The main claim to fame is the cover glass known as Corning Gorilla Glass. This segment contributes approximately 12% of sales for 2016.
Life Sciences Segment – The primary focus of this segment is scientific laboratory products such as plastic vessels, specialty surfaces, and media. Most of us are probably familiar with the PYREX beakers from our high school chemistry class; Corning made them. This segment contributes approximately 9% of Corning’s sales for 2016

Two of the main products that Corning produces are LCD glass and Corning Gorilla Glass. Let’s take a little deeper dive into the both of them.

LCD – This stands for liquid crystal displays that are used primarily in televisions and computer screens. Corning is a leader in glass making, and they have created several technologies that allow them to build flat glass. That might sound like a duh, but substrate flatness is critical in the production of panels for LCD TVs. Any deviations from flatness can create distortions, and nobody wants to watch the Super Bowl through distortions.

Corning has created a proprietary fusion process where the glass is formed in air and then drawn down to form an incredibly flat piece of glass with very precise thickness controls. To see a video of this creation, it is amazing to see.

They continue to push the envelope on creating thinner, stronger and more durable glass, which has more and more applications. Corning has created four LCD types of glass utilizing them in many different applications. They are:

Eagle XG, the industry’s first LCD glass substrate that is free of heavy metals;
Eagle XG Slim Glass, a line of thin glass substrates that enables lighter-weight portable devices and thinner televisions and monitors;
Corning Willow Glass, the ultra-thin flexible glass for the next-generation consumer electronic technologies;
The family of Corning Lotus Glass, this high-performance glass is used in LCD, as well as OLED which allows for brighter, more energy-efficient displays with high resolutions.

Corning glass is made all over the world. Corning is a little different in how they handle their manufacturing, in that they build plants to supply their customers where they are as opposed to production in one location and shipping all around the world. Because of this, they have facilities in South Korean, Japan, Taiwan and China which allows them to service their customers directly.

The net sales for the Display Technologies segment were up 5% or $152 million compared to the same period in 2015. The increase in sales driven by the strengthening of the Japanese yen and a mid-single-digit percentage volume increase driven by our need for larger TV screens. Partially increasing the offset by the LCD glass price declines which were slightly higher than 10%. We will discuss this a little more in the risk section.

Projections for 2017 in regards to LCD are that they expect retail TV units to be flat, but with a growth of screens by 1.5 inches, which will contribute 4% to 5% to the end market growth. They also think that in IT, the units sold will be flat but larger screen sizes. Which they believe will not lead to any increase in the market. Also, they feel that they have healthy inventory levels and expect their demand to be up in the mid-single digits, as the demand for LCD continues to decline Corning has begun to convert some of their manufacturing to the adoption of smartphone applications.

They also expect that the price declines of 2017 will be less than was seen in 2016, which they think will be the smallest declines in the last five years. They expect that Q1 of 2017 will be more moderate and very similar to the drop in 2016, which was the best result in five years. Remember that Q1 is typically the quarter with the largest decline because that is when annual supply agreements were final.

Gorilla Glass – Arguably the most famous product that Corning produces. It is an high-technology, incredibly tough glass that is used for just about everything now. From windshields on cars to your cell phone, computers, markerboards, and interior architecture. Gorilla Glass is extremely durable and offers distinct advantages over other materials.

The glass is chemically strengthened through an ion exchange that helps create an “armor,” making it very resistance to damage, i.e., dropping your phone. It is also incredibly thin and retains its performance advantage over other cover materials. Because of Corning’s proprietary fusion process, it is incredibly clean, smooth, flat and has amazing optical clarity. All these features make this glass the perfect cover material for touch screens.

Net sales for the Specialty Materials segment improved 2% for 2016, or $17 million. Specialty Materials was driven by an increase in sales of Corning Gorilla Glass 5, although the first three-quarters of 2016 saw lower sales, there was a surge in the fourth quarter due to the rapid adoption of Corning Gorilla Glass 5.