GLW - Corning: A Timeless Gem Poised For A Comeback

2023-08-22 08:10:00 ET

Summary

• Corning is a long-standing company with a diverse portfolio of products, including display technologies, optical communications, and specialty materials.
• The company has experienced a recent downturn in revenue and margins due to supply chain disruptions and cost inflation, but there are signs of improvement.
• Corning may benefit from the AI boom and expects growth in its optical communications, automotive exteriors, and solar business. The stock is attractively priced and offers an appealing dividend yield.

Call me old-fashioned, but I have a hard time with chasing growth stocks that trade at nosebleed valuations, preferring instead to stick with the tried and true over the bold and new. That's why I'd rather stick with old 'economy' stocks that have proven business models and have stood the test of time.

This brings me to Corning Incorporated ( GLW ), which I last covered here back in April of this year. The stock hasn't done much of anything since then, declining by just 0.4%, while the market remains seemingly wary of demand for display technologies. In this article, I discuss why patient value investors ought to consider GLW before a potential turnaround, so let's get started!

Why GLW?

Corning may be thought of as being one of those 'Great American' companies that have stood the test of time, with a history that dates back 170 years. While its display technologies on smartphones and TVs may be its most visible product, it actually has a diverse portfolio of products that also serve optical communications, environmental technologies, specialty materials, and life sciences. This diversity has allowed Corning to navigate economic uncertainties by not relying heavily on a single revenue stream.

As shown below, GLW's topline revenue is up by 70% over the past 10 years, but not without ebbs and flows along the way, with the present time appearing to be a near-term downcycle. This is reflected by net sales being down by 19% YoY to $1.07 billion.

Supply chain disruptions and cost inflation have also pressured GLW's margins since the start of 2022. However, things appear to be looking up this year with a bounce back of EBITDA margin to 25.7% in the latest quarter, as shown below. Despite the near-term drawdown in margin, GLW still maintains an A- grade for its EBITDA margin of 21% over the trailing 12 months, sitting well ahead of the 9% sector median.

The recent uptick in EBITDA margin was driven by positive pricing actions and productivity gains as gross margin rose by 260 bps since the start of the year to 36.2%. Moreover, sales rose by 2% sequentially to $3.2 billion during Q2, and management believes that the volume recovery in Display Technologies has already begun with sales rising by 20% sequentially driven by higher volume.

The market may also be overlooking the potential benefits that GLW could achieve from the AI boom. That's because GLW expects to see an uptick in demand for its Optical communications, as the leading players in large language models are building data centers with a second optical network that increases connectivity by up to 5x within individual data centers.

This is in addition to GLW's automotive exteriors for electric vehicles, efficient production in Viridian Vials for life sciences, and scaling of its solar business, the last of which management expects to add hundreds of millions of dollars in annual profits and cash flow beginning in 2025.

Risk factors to GLW include the cyclical nature of its business, especially as it relates to its display and automotive segments. This relates to both its U.S. and international businesses, and the recent slowdown in China may present a near-term headwind for the company. In addition, acquisitions in recent years have added $1.3 billion to GLW's net debt balance. At present, GLW carries a net debt to EBITDA ratio of 2.5x. While this sits below the 3.0x level generally preferred by ratings agencies, I'd like to see this trend back down toward the 2.0x level.

Meanwhile, GLW currently yields a healthy 3.5%, sitting well above the 1.5% of the S&P 500 ( SPY ). It also comes with a higher 5-year dividend CAGR of 10.4%, sitting above the 7% for SPY, and comes with a 60% payout ratio and 12 years of consecutive growth.

Lastly, GLW is currently attractively priced at $32, which sits toward the low end of its 5-year trading range between $30 and $46, excluding the early pandemic months in 2020, during which the stock price dipped to $20. While GLW doesn't appear to be cheap with a forward PE of 17, this may be justified by analyst estimates of 25% EPS growth next year, and 15% to 23% annual growth in the two years thereafter, as demand across business lines and margins are expected to improve. Considering the above, I see the potential for GLW to trade in a $35-$40 range over the next 12 months with a rebound in demand.

Investor Takeaway

Corning has been around for over a century and offers a diversified lineup of products that have seen revenue growth over the past 10 years. Its current downturn may be coming to an end as with positive pricing actions, productivity gains, and a rebound in volume. With the stock remaining in the value range and an appealing dividend yield, patient value investors ought to give this dividend stalwart a hard look at the current discounted price.

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