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Breaking Down This Glass Company: Corning (GLW) And More

Added on by Lee Ho Fook.

Be sure to check out our detailed stock analysis (click here). Glass company Corning (NYSE: GLW) is heavily exposed to the display market, but is this a negative or a positive? Quite possibly both. The developer of advanced glass substrates could benefit nicely from any slight turnaround in the TV industry. 

In just looking at Corning's financial statements, its reliance on display income is underrated. By adding in Corning's joint ventures with Samsung and Dow

…a pro forma calculation that includes the JVs shows that Corning's reliance on the display market is more robust than expected. The LCD glass business (which includes Display and Samsung JV) is 35.4% of revenue and a whopping 78.5% of net income. 

The display segment has been growing, with revenues up 2.6% last quarter year over year, which was better than the company's guidance of low to mid single digit decline. 

Corning's strong position in other markets should also not be discounted. Telecommunications, behind display, is Corning's second largest segment by revenues and grew at 3.3% last quarter from the prior-year quarter. Corning is also seeing higher demand for Gorilla Glass, as Corning's handheld customers upped production thanks to new products. 

Gorilla Glass is the primary growth factor in its specialty materials segment, which is also its third largest segment. The specialty materials (Gorilla Glass) segment saw a very solid increase last quarter from the prior-year quarter, growing revenues 68%.

At the end of 2012, Corning had a total of 39 of the hedge funds long the stock, up 11% from the third quarter. The hedge fund manager with the largest position ($184 million) is Donald Yacktman's Yacktman Asset Management (see which other big names own Corning). 

Industry Tailwinds 

BB&T estimates that U.S. TV shipments continued declining year-over-year in January and February, but also expects shipments to increase in the second-quarter of 2013. They forecast 2013 U.S. television shipments will grow by a low-single-digit percentage, driven by consumers continuing to shift to larger screen size models, higher LED penetration, an improving macroeconomic environment, and falling television prices. 

One of Corning's competitors is PPG Industries (NYSE: PPG), which is a global supplier of protective and decorative coatings, where its glass business consists of the flat glass and fiber glass businesses. However, this company's key growth driver will be its coating business, where it plans to expand into faster growing markets but also divest lower margin segments. Its glass segment only accounts for 7% of revenues. 

While Corning is a leader in the glass market, PPG is one of the big three in the coatings battle for market share, competing with the likes of Sherwin-Williams and Akzo Nobel. PPG also struck a deal with Akzo Nobel in late 2012 to buy its North American architectural coatings business for $1.05 billion. However, I don't necessarily see this as a positive, given that the U.S. housing recovery remains slow and that 10% of all global architectural coatings demand come from South and Central American.  

Unlike Boston's 39 hedge fund owners, PPG only had 32 hedge funds long the stock at the end of 2012, this includes the top position, of $172 million, held by Richard Pzena's Pzena Investment Management (check out the hedge funds that dumped PPG).

A couple of other unique products companies include Thermo Fisher Scientific (NYSE:TMO) and PerkinElmer. Thermo Fisher is in the business of serving the science industry by offering services for instruments and laboratory equipment. PerkinElmer is another science industry servicer, offering solutions to the diagnostics and lab markets.

Thermo's largest segment is its laboratory products business, which accounts for about 48% of sales. Its other major segment is government and academic end-markets, accounting for 24%; despite the sales weakness in both segments, the company's geographical footprint has allowed it to post solid year-over-year results. Fourth quarter results showed that EPS came in at $1.36, compared to $1.19 for the same quarter last year. This comes on the back of 6% sales growth year-over-year, with China sales rising 23%. 

Thermo actually had more hedge fund interest than Corning at the end of 2012, with a total of 40 hedge funds long the stock, but this was a 13% decline from the third quarter. The top hedge funds dumping their stakes were First Pacific Advisors and Andreas Halvorsen's Viking Global (check out Viking's high upside picks).

PerkinElmer offers solutions to the diagnostics and laboratory services markets. PerkinElmer's key segment is human health and environmental health, which helped drive earnings growth last quarter on a year-over-year basis. The segment managed to post 4% sales growth year-over-year and 3% organic sales growth. 

When considering Corning's market share position, there really is no perfect competitor. Corning, when accounting for its Samsung JV, owns over 60% of the glass substrate market. 

By the Numbers

Even compared to its peers and certain companies operating more in the lab and science equipment market (a much faster growing market than display in my opinion), Corning is the cheapest.

However, is it possible that Corning deserves this below industry valuation? Not when you consider its profitability, balance sheet or expected growth; Corning is a leader in all categories, having the highest EBITDA margin, lowest debt ratio and highest 5-year expected EPS growth rate.

Corning also has the highest dividend yield of the four stocks listed, yielding 2.7%. What's more is that the company is becoming increasingly aggressive with returning capital to shareholders by upping its dividend: 

Don't Be Fooled 

Assuming the TV market shows signs of rebounding and companies continue iterating new tablets and smartphones, Corning will be one of the best positioned companies from a growth and valuation standpoint. The company also offers investors an impressive dividend.