This article was originally published — with more or less the same clues and the same pitch, and the same stock being featured, back on September 4, 2012. I’ve added this note to the beginning and a supplemental note to the end, and changed the headline (back in September their hype was “Time is Running Out… Just 6 Trading Days Remain to Buy This Stock”), but the meat of the article (and the identity of the stock) are unchanged.
And, as luck would have it, this stock has done substantially better than Apple over the last six months, since it was teased the first time — though that’s because this stock is now right where it was six months ago, and Apple, as every investor in the world probably knows by now, was topping out at near $700 at that time. The old article starts now:
There’s no shortage of teaser picks we could consider for you today, but since this particular pitch claims to be so time-sensitive … and since, like all good stories over the next ten days, it’s tied in to the rumored release of the iPhone 5 next week … well, I couldn’t resist.
And as a bonus, it’s from a newsletter we don’t write about much — Charles Mizrahi’s Hidden Values Alert, which has had a decent history according to Hulbert (the only time I’ve written about Mizrahi was for a different newsletter of his late last year — the pick, Leucadia National as the “next Berkshire”, was not particularly well timed).
So what’s the idea this time? Here’s a taste of the tease:
“Hand-Picked by Steve Jobs in 2005…This Company Stands Poised to Deliver Explosive Returns over the Next 12 Months
“More than 600 million devices worldwide contain this “breakthrough” – yet most people have never heard of the company that makes it! ….
“The breakthrough was first developed back in the 1960s – but it was so ahead of its time that there was no market for it.
“After only 100 orders, the company quit making it.
“And then Steve Jobs came calling in 2005.
“Before going to market, Jobs was testing Apple’s latest product, the iPhone. He noticed a flaw in the product and he was outraged. There was no way he would allow consumers to have that same problem.
“It was then he stumbled upon this company’s unique 40-year-old “breakthrough” – and he instantly recognized that it was the missing ingredient that would make the iPhone… perfect.”
If you’re a longtime Apple follower, or a real teaser devotee, then that’s enough clues for you and I bet you can name that pick. Shall we check a few of the other clues to be sure?
“It’s a forward-thinking firm with a rich history, founded in 1851 and one that is currently selling at a remarkable discount.
- This company has a cutting-edge technology that gives it an extraordinary competitive advantage in the marketplace…
- It has a better than 50% share in a market that is projected to grow like wildfire…
- Its balance sheet is impressive – and 2011 saw the company set new highs for sales, gross margins and operating income…
- And – perhaps best of all – the company’s management is aggressively buying back shares … indicating that the people who know best, company insiders, are snapping up shares as quickly as they can.
Ready? Yes, this is another teaser about Gorilla Glass, the super strong glass that’s used in iPhones and iPads and in many other portable electronics, a glass that holds up well to the scratches and cracks that would otherwise beset a tiny, fragile computer that you carry in your pocket every day. Which means that like many before him, Charles Mizrahi’s newsletter is pitching and teasing the old ceramics and glass innovation powerhouse from Corning, NY — Corning (GLW).
We’ve looked at Corning a few times, and I’ve owned it in the past (at the time I sold, about a year ago, it was on the epiphany that owning a slow-growth supplier to Apple was stupid if you could instead buy fast-growth Apple at essentially the same valuation, so I sold Corning and bought Apple). Corning is a significant supplier to Apple and to the other tablet and mobile device makers, and it clearly maintains a leadership in pretty much all areas of glass and ceramic innovation — and, not incidentally, it has incredible manufacturing expertise and huge capacity for glass production. Unfortunately, Corning’s largest business (by far) is television glass — the massive sheets of glass that are used for LCD and plasma flat screen televisions, and that market boomed and busted quite thoroughly … not because people have stopped buying TVs, but because the massive upgrade cycle of televitions, when everyone replaced their cathode ray and standard definition sets with flat panel HD sets, is not going to happen again. Unless everyone suddenly decides they need a 3D television, which I consider possible but doubtful.
So Corning is doing quite well with their Gorilla Glass in tablets and phones, but they have massive capacity and competition in their largest business line and prices have been dropping considerably, and Gorilla Glass (and their other significant product lines, fiber-optic cable and ceramic filters for diesel engines) are nowhere near big enough to make up for the slowdown in earnings from television glass. Ian Wyatt actually teased Corning a few months ago as a play on the oft-rumored Apple TV, when everyone was talking about Apple releasing a widescreen television set … but even that possible product, unless it truly revolutionizes TV and sells with the same kind of volume that Best Buy saw in cranking out HDTV sets five or six years ago, is not going to singlehandedly turn things around for Corning’s LCD glass sales.
Which is why, of course, Corning shares look dirt cheap. Analysts are predicting that this year earnings will be substantially lower than last year’s, and will grow just two or three percent a year going forward. Which is what they’ve done for the past five years, which have been yo-yo years for Corning in many ways but have averaged out to low-single-digit earnings growth. That’s not what anyone likes to pay a premium for, and it’s decidedly non-sexy, so it’s no surprise that Corning is now trading at a PE of just about 8, a substantial discount to the market and to most of their peers in the high tech/industrial space.
On the other hand, this is also an incredibly successful and well-run company — they have great profit margins, they have a couple dollars in net cash per share and a great balance sheet, and they are the leaders in all their product lines. It’s just that their major product, LCD glass, isn’t growing very fast and is a victim of massive overcapacity problems that mean Corning really can’t put together any serious revenue growth. And while they are well-run, they can’t turn overcapacity and sagging revenue into earnings growth unless something really takes off — like Gorilla Glass. It is doing very well as a product, from what I can tell, but the glass revenues from a couple dozen iPhones or iPads, even with the premium price that Gorilla Glass commands, probably don’t approach the revenue from their high-spec glass for a single 72-inch television. That’s just a guess, I haven’t checked the numbers, but it’s the basic problem that Corning faces — they get headlines for this fast-growing product that’s going into iPhones, but that product isn’t enough, at least yet, to drive revenue growth for a company that last year booked almost $8 billion in sales. Corning is a big, big, company but, as big companies go, they are also extremely non-diversified … kind of like Apple, actually.
So … is there any reason to rush out and buy Corning? Well, the price has recovered somewhat after dipping down just below $10 earlier in the year, and the stock is cheap, but it is hard to see a particular growth catalyst that will make folks want to make the stock expensive. It does yield about 2.5% and they’ve bought back stock, and clearly folks are willing to take a chance on a major Apple supplier if it gets really scary cheap so there is some sort of floor under the shares, perhaps in the $8-10 range somewhere, but Corning is a value stock and very likely won’t be impressing anyone with its growth over the next 18 months … whether it turns out that it’s a value trap or not depends on what happens after that — a return of pricing power in LCD glass, or the adoption of Gorilla Glass for more large and mass-market products (like TVs, which they’ve already tried with limited success), or whatever new ceramic or glass innovation is next in line. There’s no reason to say it’s a terrible pick down here around $11-12, but it’s a pick that I’ve been watching over the last year or so since I sold my shares … and I’ve been completely unable to get excited about it so far.
Back to the current update again … Corning has been doing great for the last couple days, back up over $13 for the first time since October, and it’s still pretty cheap, but it’s not growing. Analysts still expect them to have earnings that are slightly lower in 2013 than they were last year, and to then get back to high single digit growth rates, ramping up to 12% growth over the next five years. Those kinds of growth projections are never particularly accurate, of course, but they give some basis for guesstimating a valuation — and they give GLW a PEG ratio (price/earnings/growth) of below 1, which is a shorthand way of saying they’re probably cheap. They’re finishing up a big investment in new plants and equipment this year, so that’s probably a reason for earnings growth as much as anything else — they’re spending less, though it’s not clear how much their core business will grow when it comes to revenue.
And it’s still hard to buy Corning based on the Gorilla Glass story — it’s clearly one of the bright spots in their product portfolio, and Gorilla Glass is growing nicely, but display glass (mostly for televisions) is still the overwhelming driver of Corning’s revenue and profits, and will be for many years. Corning’s model is built to supply massive quantities of glass, acres of it, and obviously a smart phone uses a lot less glass than does a 60 inch television. Gorilla glass sells at a premium to their regular display glass, and it is in demand, but there is and will be competition, and volume just isn’t high enough yet to move the numbers much — display glass supplied 84% of income in the last quarter, and new materials, gorilla glass, diesel filters and fiber optics (where they’re also continuing to innovate and improve performance) brought in the rest.
The stock’s still cheap, they’re still a technological leader in glass and ceramics, they’re still growing the dividend, and you can argue that it might deserve a more average valuation instead of a depressed one (applying the average S&P 500 PE of 13 on Corning’s 2013 analyst earnings estimates would put GLW at just over $15, so that would be a 15-20% gain), but it’s hard to see the stock becoming a growth darling or getting a premium valuation as long as LCD TV glass remains in such oversupply.
Oh, and for the sake of full disclosure: I do still own Apple shares and don’t own any of the other stocks mentioned above, and won’t trade in any stock that I write about for at least three days after publishing.