Rethinking Corning

 | Nov 11, 2013 | 4:00 PM EST
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We have discussed and recommended Corning (GLW) a number of times over the past 18 months. The stock is up very nicely during that time, gaining 31.6% year to date and more than 50% in the past 12 months.

While profitable, GLW has not had a smooth ride. The company has had a number of starts and stops over this period that have taken investors on something of a rollercoaster ride. Positive quarters or positive product developments have been followed by revenue misses and lowered guidance. The stock continues to take a path of three steps forward and two steps back.

While we like management and believe they are running the company very well for the long term, we have been frustrated by their lack of urgency to enhance shareholder value. Management does a great job developing new products and entering new markets; unfortunately, they have not been able to translate these developments into consistent earnings growth.

During the past month, GLW has had a great deal of news flow. Most of it has been very good, which should lead to continued stock gains. The best news for the month was the company's announcement that it is acquiring the remaining 50% stake in Samsung Corning Precision from Samsung.

The deal will be immediately accretive to earnings by 20%. GLW also gains full control over the South Korean venture, which should allow it to shrink capital spending (as well as slow growth in industry capacity), to gain full control over the cash and cash flows of the joint venture, and to sell to new customers and markets which were restricted under the previous joint venture agreement.

As part of the buyout, GLW also entered into a favorable 10-year supply agreement with Samsung to provide glass. Finally, the company also announced a new $2 billion buyback, which they expect to complete by year's end 2015 (if not sooner). GLW just hired JPMorgan Chase (JPM) to complete the first $1 billion of this buyback on an accelerated basis by March 2014.

Shortly after announcing the deal, GLW reported solid third-quarter revenue and earnings, although it was a bit more cautious on the fourth quarter. However, beyond the short-term caution, management was upbeat on the upcoming year.

Several days after these positive news developments, Apple (AAPL) announced a deal with GT Advanced Technologies (GTAT) to supply Sapphire Glass, a premium scratch-resistant cover for smartphones and tablets. In all likelihood, this will slow the future growth rate of GLW's rapidly growing Gorilla Glass franchise, a negative that bears watching. While this competitive threat might slow Gorilla Glass's growth, we don't believe it will derail the product.

This development has caused a pullback in Corning's stock price, which we believe makes it an attractive buy here. The positive Samsung Corning Precision acquisition and share repurchase program should overwhelm any potential negatives associated with Sapphire Glass's competition against some of GLW's product lines.

On Monday, there was another news item that could offset some of the negatives associated with AAPL's investment in GT Advanced Technologies. Bloomberg News reported that Apple is developing new iPhone designs with bigger screens and curved glass. While the bigger screens is always a plus to all potential manufactures, GLW is the only supplier on the market that has a glass product (Willow) that can be easily curved. If this becomes a reality, it further solidifies GLW's strong position as an AAPL supplier.

GLW is reasonably valued at 11.6x 2014's earnings per share estimate of $1.43, and the company still has many opportunities to grow earnings and shareholder value. Bottom line, we think the recent Sapphire Glass scare gives investors a chance to buy this quality franchise with lots of recent good news at a very attractive price.



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