“Tailpipe Riches: Car of the Future” Outstanding Investments

By Travis Johnson, Stock Gumshoe, June 25, 2008

It’s been a little while since I looked at something from Outstanding Investments, so this one caught my eye. It was buried in a long teaser email that was all about Saudi Arabia lying about their oil reserves, and the various solutions to the oil crisis … but about halfway down, Byron King started teasing us about a company that will be helping to enable the “car of the future.”

Part of the reason to pay close attention, by the way, is the recent track record of Outstanding Investments — it has been the strongest performer in the Hulbert database for the last five years, thanks in part to a focus on commodity-related stocks, so although it’s had a few different advisors and past performance is no indicator of future results, I do like to keep an eye on what they’re doing.

King goes through the various options for solving the problem of making cars more efficient and green, essentially saying that the Prius is great but is not a mass solution because of expense and weak highway performance, and that natural gas or hydrogen will not be taking over immediately, either. Hard to argue with him in the short term, since natural gas seems largely destined for fleet use and there is no infrastructure to speak of for hydrogen (though a hydrogen fuel cell car comes along every now and then, like Honda’s recent foray).

He focuses on the gunk that comes out of the engine … and says that the key to the future is diesel.

The logic is interesting — you can make diesel out of coal or other oils (ie, biodiesel), so there is some potential for weaning from crude oil, and it is more efficient than gasoline in general, and King argues that the next breakthrough will be diesel combined with hybrid technologies.

But it’s what comes out the tailpipe that has historically clouded our perceptions of diesel, at least in the U.S.

“Emissions are the key to profits … the way to profit from the diesel revolution is to buy the company that’s going to remove the last
obstacle that stands in the way of diesel: pollutants.”

He throws in some jibber jabber about Europe and their widespread adoption of diesel in passenger cars (true) because of its increased efficiencey (also true, as far as I can tell).

But he says they’re also looking for the next wave — Europe and, a bit behind, the US have mandated stricter standards for diesel to create a cleaner burning fuel, and big engine makers have really benefited from a big upgrade cycle as heavy truck operators upgrade their fleets, which folks investing in Cummins (for example) have really enjoyed … but cleaner diesel still ain’t “clean.”

“You see, the Europeans still haven’t been able to remove the last bit of filth from diesel exhaust. They’ve just put up with it for the sake of fuel economy and lower carbon emissions.

“Whoever comes up with the best diesel tailpipe solution stands to make a killing. And a high-tech American company has done exactly that. It’s come up with a diesel filter that’s far superior to what the Europeans now have.”

Byron goes on to tell us that “diesel tailpipes” will be a billion dollar market by 2010. And that this company “will be on every front page in the country.”

So what is it?

“This company is a technology leader that created one of the most important inventions of the ’90s telecom boom — but I’m not talking about Microsoft or Intel or any of the obvious choices. The company I have in mind keeps a lower profile.

“… My crystal ball says its technology is going to wind up in 200 million vehicles. I’ll tell you all about the stock in a FREE special investment report called Tailpipe Riches: The Race to Build the Car of the Future.”

So what is this company?

Well, I’ve already seen them on the front pages of newspapers dozens of times, but that’s because I grew up just down the road from their headquarters in upstate NY — this is …

Corning (GLW)

Do love the old GLW ticker — from the days when they were a simple glassworks, with an army of glass blowers.

Corning’s contribution to the tech revolution of hte 1990s was, of course, fiber-optic cable — the inventor of this tiny strand of spun glass worked for Corning back when he came up with the stuff in the 1970s. And they both gloried in that and suffered from it, as the massive overbuilding of fiber networks in the 1990s gave them a true boom and bust experience up in Corning, NY.

And this was no garden variety boom-bust — if you happened to buy GLW at it’s height, around $110, you could have been one of those poor souls who got shaken out and sold near the lows just two years later, right around $1.50. That’s a loss of greater than 98% … which scared folks away from Corning for probably longer than they should have been scared. Since then, the shares bounced rather quickly into the $10 range, then slowly and gradually doubled to their current range, in the mid-$20s.

Corning is now primarily looked at, at least by retail investors, as an LCD play — they’re a dominant maker of the special large format glass screens used in everyone’s favorite new HDTVs, and they say that business is still going pretty well, though fears for the consumer have some a bit worried.

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This business that Byron King is teasing us about has been a relatively small part of Corning, but might indeed grow much larger if he’s right. They make ceramic substrates for diesel catalytic converters and filters, apparently (I don’t know if those are the correct technical terms), and have been in similar businesses for many years — they also invented the basic substrate that most standard catalytic converters have used for decades.

Diesel vehicle emissions are certainly a growth area for Corning, though I couldn’t tell you what that’s going to do for Corning’s growth … or whether diesel will really end up being the main solution, with or without new filters. I suspect this will be a good business for them, but I would be surprised if the returns were so dramatic that the shares double by January or anything exciting like that (King didn’t specifically predict that, to be fair).

That’s largely because Corning is a huge company, with a $40 billion market cap and annual sales of about $6 billion and growing. I like the company, and if you want a great, innovative American company with ties to heavy industry, healthcare, technology and other areas where there is potentially interesting growth, and a culture that has nurtured many breakthrough inventions, I can’t argue against buying shares in this one.

The only thing that gives me some pause is that Corning, though it is a large and diverse business, has tended to ride those boom and bust waves in some big product areas on occasion, and LCDs might, I suppose, be another one of those if margins sink with competition, or sales drop.

So far, Corning is indicating that won’t happen — their shares just jumped a couple percent because they released an optimistic forecast for LCD sales. So you do get the flip side of that, too, in share price outperformance over shorter time frames — just look at another innovative company that has its fingers in pies across the product spectrum, 3M: the more conservative MMM has dramatically lagged GLW and their big bets on a few products in the last five years. I like 3M, too, but they seem to be a bandleader in search of a hit lately, while GLW is playing the chart-toppers over and over and hoping not to lose the tune. MMM’s chart for ten years has been a slow and steady climb, GLW’s has been Everest followed by Death Valley, followed by Mount McKinley. Nothing wrong with that, just know what you might be getting into — it takes all kinds, and GLW and MMM are given roughly similar valuations by the market, and are of similar size (though the comparison may not be fair for a multitude of other reasons). Over ten years, they’ve both more or less doubled — but it was a lot harder to pick good entry points in GLW, while time and a larger dividend have made almost any shares of MMM bought during that time work for most investors. If you’re trading and like shorter term profit opportunities, however, GLW has certainly been dramatically more volatile, so saddle up and enjoy.

So where were we, before that probably largely pointless comparison? Oh, right — diesel filters. If you want to learn about Corning’s work in this area, there’s a good summary article from the Wall Street Journal from back in March, available here as a pdf.

And just in case I confused things too much by hauling that comparison to MMM out of thin air, this might be the time to note that yes, just as in all areas of life, there is competition — 3M makes ceramic diesel particulate filters, too, as, I’m sure, do many others, though it’s been Corning that has been lauded for breakthroughs in this area of late.

The shares seem reasonably priced, at a small discount to the greater market. Not much debt. A tiny dividend. Nothing to sneeze at, just be aware that Byron King’s projected billion dollars in diesel tailpipe business (even assuming that GLW dominates that market) isn’t necessarily going to make Corning shareholders wealthy overnight. I’d probably be happy to own GLW (or MMM, for that matter), but I don’t right now.


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