by Travis Johnson, Stock Gumshoe | February 18, 2010 11:25 am
I was just puttering around this morning, trying to decide which ebullient and/or egregious teaser ad to focus on, when a new one came rolling in across the virtual transom … and it looked like just the thing to wake a Gumshoe up, so let’s dig in!
The ad is from Horacio Marquez for his Money Map VIP Trader, published by one of the many Agora offshoots in Baltimore — and for $495, he’ll tell you just how “This $300 billion breakthrough is poised to hand you an easy 412%, starting in 48 hours…”
Sounds good, right? Well, in that case the Stock Gumshoe version should sound positively delicious, coming as it does at the low low price of free (unless you choose, out of the goodness of your heart, to join the mighty horde of Irregulars). Of course, I’m not going to follow the stock for you, tell you what price to pay, or cover it in as much detail as Marquez probably will … but I can read the clues and sniff out the stock and the ticker, and tell you what I know about them.
Marquez, by the way, is also the one behind last fall’s breathless tease of the “Battle for the Third Element” that got a lot of attention … and that, along with the more recent Beryllium and Lanthanides teasers, gave me bad flashback dreams about trying to memorize the periodic table back in High School. But I’ll try not to hold that against him.
So let’s get started, shall we?
The tease is all about fiber optics — and about how a new technological breakthrough in these wee glass fibers can help prevent the kinds of internet outages caused by traffic spikes, data-hog smart phones, HD video and everything else that uses the increasingly bandwidth-hungry internet.
Marquez paints a horrifying picture of the problems that have hit internet users, including several examples that most of us probably heard about of smart phone problems — the data loss from the T-Mobile sidekicks and from the new Google Nexus One phone, iPhone outages, Blackberry outages, etc. Here are his words:
“Beyond the outrage and the lawsuits, every crash costs America millions of dollars – with potential losses in the billions.
“Right now, these cracks in the system are only getting bigger by the day.
“According to the U.S. Internet Industry Association, to fix the bandwith problem in the networks will now cost: “$300 billion to $1 trillion for the United States alone…”Are you getting our free Daily Update
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“I’m here to alert you to one company with a breakthrough technology – the only one that can solve this crisis.
“Demand is already skyrocketing for this breakthrough. Just consider that this company’s income has already risen 45 times over in the last three quarters.
“And it’s got no competition. In fact, it’s about to hold every major telecom in the U.S. and abroad hostage – for a king’s ransom”
OK, so it’s worth remembering that choosing “the last three quarters” means that you’re starting at what most companies experienced as a significant earnings trough at the end of 2008 and beginning of 2009, so even a 45X increase in earnings might just be a “return to normalcy.” We’ll see.
So what other clues do we get? Here’s some more about the product:
“25 Trillion Bits Per Second… Wrapped Around a Pencil
“The breakthrough I’m talking about is in fiber optics – but not the way you may think about it….
“You see, the current fiber transmission rate is 2.5 billion bits per second. In its day, it was an incredible feat.
“Yet this new breakthrough technology creates a pipeline that handles 25 trillion bits per second.
“That’s 10,000 times greater than what’s commonly what’s being used throughout the world today.
“That alone would have any technology investing salivating over the prospects. Yet the true genius of this invention is even more powerful. It’s what has the major telecoms chomping at the bit…
“You see, this breakthrough technology is able to bend light.
“Most Scientists Said It Couldn’t Be Done…
“By the middle of 2007, this company’s scientists were doing what no scientist in his right mind ever thought could be done. Except for measurements in astronomy – where light is bent by the extreme gravitational forces of the sun – it’s never been “bent” for practical purposes on earth.
“It used to be that every time a fiber cable was bent, the light carrying the data vanished. A few slight turns of the cable, and the data disintegrated. Even if it’s bent just a little, the data escapes.
“This drove telecom companies nearly half crazy, drilling through walls of apartment buildings, offices and other tight places.
“That was before nanotechnogy and the breakthrough that’s taking hold today, making it possible for this company to wrap its optical fiber. The “nanostructure” guides light back into the fiber, even when it’s bent.
“It’s so effective that these precious cables can be wrapped around a pencil or even tied in knot – with no loss of data… while still transmitting 10,000 times more information than regular fiber.”
And then he gets into some detail about the stock and the company:
“For high growth in the next 6 to 12 months, I’m begging my readers to get in now… before the coming wave of sales takes hold and pushes
this company up even faster.
“The Pew Research Center estimates that 22 percent of American adults have cut back or canceled cable within the past year. And within that group, 32% have connected their computers to their TVs to view Web video.
“Consumers are simply ditching cable and getting loads of TV shows and movies from services like Hulu, Netflix and iTunes.
“With Netflix alone, nearly 3 million users now access its instant streaming service, watching 5 million movies and TV shows every week on their PCs… Xbox 360s… Blu-ray players… HDTVs.
“It won’t be long before other analysts start crunching the numbers on this company and realize that it has:
“A 15% Return on Equity – pummeling the 1% industry average…
“A whopping net profit margin of 37%, blasting light years ahead of the 3% industry average…
“An amazing $3 billion investment in China, with eight manufacturing plants.
“That’s not all.
“Quarterly profits for this little gem have nearly tripled from $249 million to $740 million… revenue has increased 41%!
“And as I’ve said, income shot up over 45 times in just three quarters!”
Well, I hate to say this … because even the reluctant Gumshoes among you would probably have guessed it … but this is, indeed, our old friend Corning (GLW — click here for a free trend analysis on GLW from MarketClub, one of my advertising partners), which has long been the king of fiber optic cable and innovator of all things transparent and breakable, from Pyrex to the massive sheets of glass used in new flat screen TVs.
Corning does indeed have close to a 15% return on equity (it’s 14% over the last twelve months), and a gross profit margin of 37% over the last year (operating margins are also very impressive at 20%+ and have improved, through cost-cutting, it appears, though the gross margin is down from where they were a few years ago). And yes, they have invested over $3 billion in China, largely in new manufacturing plants to supply glass to Chinese and regional TV manufacturers.
And, of course, they did invent this “bendable fiber” — they call it “ClearCurve”, and they did announce the discovery in 2007, to great acclaim. This was a big deal, in part because it finally made fiber-to-the-home feasible for apartment buildings, where conduits and twists and turns made it impossible to deliver “traditional” fiber directly to each apartment for the highest possible connection speeds. They’ve continued innovating in this area, also developing more advanced bendable fiber for data centers and internal networks, you can see more info about ClearCurve here if you’re curious. Corning is not the only optical fiber manufacturer in the world, but it’s clearly the dominant player and the innovator of the most advanced products — other big glass companies like Asahi in Japan also sell fiber optic cable, and there are Chinese competitors who, it sounds like, mostly do contract manufacturing and make a “commodity” cable product, but I don’t know of other big companies that focus as much on fiber.
But if Horacio Marquez is right that this stock will bring estimated gains of 412% in the coming months to his subscribers, then we’ll have to remember to check back and give him some credit if he turns out to be right, because that prediction is pretty far outside the mainstream expectations for Corning. And in fact, Corning itself is telling people to expect a light (sorry, no pun intended) year for their fiber optic business as the big telecom operators are likely to be slow to push capital spending until the recovery really takes hold.
That doesn’t mean Corning will have a bad year — they have three major businesses, including display glass (mostly for TVs, computers and handheld devices) and environmental technologies (mostly automotive — diesel filters and similar filtration products), and display glass is by far the biggest business, and the best grower right now. Corning had an analyst day about two weeks ago when they projected a flat-to-slightly-down year for fiber optic cable sales due to light capital spending (in part because of the big buildout that has already been done, for stuff like FiOS and the Chinese 3G networks, and in part because of timid telecom executives). The company has historically dedicated about 10% of sales to investment in R&D, and they say they’ll continue that push, with a focus on what they call “innovation adjacencies” — building on their core discoveries and developments, like the push for new types of bendable fiber in data centers and new developments in touchscreen glass.
Thanks to continued big screen TV demand, particularly in China, analysts expect Corning to earn about $1.65-1.75 per share in 2010, and to continue growing earnings at better than 10% a year for the next several years. That gives them a valuation that looks pretty compelling compared to some other big industrial companies, with a PE for the current year of just over 10 (the trailing PE using actual numbers, including that one awful quarter where they barely broke even, thus allowing for the “increased earnings 45X” statement, is 14, also quite reasonable compared to most similarly-sized industrial companies). The problem with valuing Corning, though, and the reason that the shares have often traded at what seems a discount valuation in recent years, is that for a $28 billion company they are very dependent on a small number of end markets — unlike 3M, for example, which has thousands of customers and a wide range of products, Corning rises or falls based on LCD glass sales, just as they rose and fell during the internet boom on their rising (and then crashing) wave of fiber optic cable sales.
I do like the company, I think it’s probably worth holding if you can stomach the unexpectedly high volatility for a large cap industrial stock that I think most people expect to be a behave a bit more stodgily than it does … but if we get 400% returns in “months” from Corning, I’ll be shocked. That just doesn’t jibe with the succinct summary from a recent AP article: “The specialty glass and ceramics maker expects sales and profits to rise moderately in 2010.”
Throw in some recent insider sales (which, of course, often don’t mean anything), and a stock that’s near a 52-week high, and it’s possible to see a very decent valuation and a possibly compelling investment — and they do pay a (small and not growing) dividend, and have no net debt. But it’s hard to see the shocking upside that Marquez predicts — can’t complain about Corning at this price, with some growth expected this year, but neither do I begin drooling when I look at their numbers. The outsize gains predicted by this teaser, which seem to depend on a capital spending boom by telecom companies that Corning certainly doesn’t expect in 2010, seem more feasible if you’re willing to wait a few years … though 400% still sounds like a really big stretch to me, bendable fiber optic cable is innovative, but it’s been part of telecom planning since 2007 and understood by investors for as long, and the display glass business is growing nicely but also more competitive. Marquez argues in the teaser that the company is near an inflection point where rising revenues will also send profit margins high, magnifying the returns for investors, so that and a surprise (or surprisingly early) boom in fiber optic sales must be what he’s counting on for the hyper-optimistic projections in the ad.
Interestingly enough, Corning’s innovation in their three key areas (fiber optics, display glass, and environmental/diesel filters) has led to this company being teased using each of those product lines, by different editors at different times, each time with outsize promises that sound pretty outlandish for a large, 150+ year old stalwart. Just last Fall there was a big push by Breakaway Investor claiming that huge numbers would come in thanks to California’s move to “ban” less efficient TVs, and a couple years back Byron King teased the “tailpipe riches” to come from Corning’s diesel filters, and today we get to imagine our cascading wealth thanks to Corning’s bendable optical fiber.
But that’s enough about what I think — how about you? Still feel queasy about Corning’s fall from grace following the fiber glut in the early 2000s, or eager to see if they can ride the next wave of big screen TVs and light-speed connections in every home around the globe? Let us know with a comment below.
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