Uh oh, it’s almost too late! I’m typing as fast as I can, but I’m not sure that I can get this teaser solution written up for you before Tim Cook unveils the latest iPhone today! And… there it goes, I didn’t make it. Dang.
So please, please forgive me if the stock shoots up by hundreds of percent this afternoon, and my tardiness and slow, sausage-y fingers are the reason for you failing to “make a king’s ransom.”
Does it sound ridiculous when I put it that way? I hope so — the urgency of newsletter teaser pitches usually seems kind of logical, and it’s built around real catalyst dates that sound important so you feel like you have to catch it in time! Quick!
Which makes sense — after all, the copywriters know that if you stop to think about it for an hour or two, or set the ad aside to consider later, the chances of you actually subscribing drop to almost nothing… anything they can do to make the situation urgent will help their conversion rate, and anything that makes you stop to think will hurt them. If you’ve ever tried to leave a hard-sell car dealership, you know how hard a salesman can fight to keep you (and your wallet) within eyesight of those beautiful, shiny new cars… once you leave, urgency and your “need to buy now” disappears. Copywriters are not much different.
And you know, of course, that there’s very rarely a reason to buy a stock urgently — rare are the times when buying today will be meaningfully different from buying next week… and if you do come across one of those instances, it means that the stock is on the verge of some kind of pivotal moment when it could as easily go down as up.
The teaser ad this time comes in from Ian Wyatt, an advertisement for his Personal Wealth Advisor newsletter (which seems to be the new name for his Top Stock Insights, though I’ll have to check on that)… here’s a little taste of the pitch:
“Apple’s Biggest Secret Can Make You Rich
“You won’t find it on Apple’s list of suppliers… but this small American firm builds the single most important component of every Apple device…
“This same ‘mystery supplier’ has been the exclusive source of a game-changing, proprietary material that was heavily used in the creation of every iPhone since 2007…
“This material is arguably the single most important component of every single Apple device.
“And the mystery supplier producing it is the same one that Steve Jobs specifically references in his biography…”
That will actually be enough clues for some of you to “name that stock” … but we’ll look a little more closely before we go into detail on the company (unless you’re an Irregular, of course — Irregulars who are logged already saw that “Quick Take” box just above, and probably already perused the summary so they could ignore my blather if they felt like it… pay more, get less, what a concept!)
Some more clues:
“This little-known Apple supplier isn’t some risky tech-heavy overseas company…
“Instead, it’s a dividend-paying industry leader that has been at the forefront of American technological progress for the past 164 years…
“From Thomas Edison to Steve Jobs”
So the fact that Thomas Edison used the same supplier as the Apple iPhone pretty well narrows it down to, well, one company — got it yet? Don’t worry, we’ll get to the details in a moment.
First, let’s hear from Wyatt why he thinks this particular Apple supplier should be bought for the iPhone release (and, truth be told, he’s said the same thing about this same company for most of the past iPhone releases as well)…
“… let me show you why this supplier stock is the single best way to profit from the ongoing Apple craze…
“Today, it is used by 33 brands in more than 2 billion mobile devices, and these figures are growing.
“And thanks to an investment of $815 million in research and development (R&D) last year alone, they are still innovating and bringing new technology to the world in the 21st century… like the iPhone….
“… this go-to Apple supplier has doubled over the last two years and is beating the S&P 5-to-1, the share price still doesn’t come close to reflecting its true value.”Are you getting our free Daily Update
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And we get a few specifics to toss into the gaping maw of the Mighty, Mighty Thinkolator… like these…
“… they’re holding over $6 billion in cash and short-term investments….
“Business was so robust in 2014 that they increased their dividend by 20%….
“Management initiated a $1.5 billion share buyback….”
So who is it? This is, of course, our old friend Corning (GLW), the maker of the Gorilla Glass that has been used in iPads, iPhones and other portable devices for several years… and one of the technological giants of US history with their role as an innovator in all kinds of glass and ceramics, from Pyrex to fiberoptic cable.
And yes, Corning did raise its dividend by 20% in 2014… and does have the cash to raise it more if they would like to (though their $6 billion in cash and ST investments has come down a bit, it’s more like $5.5 billion now, and they do have about $4 billion in long term debt offsetting that cash).. and they did spend $815 million on R&D in 2014, which looks like it’s the most they’ve ever spent in a year, so that gives some hope that they are still developing newer, better products for the future. They do also have a buyback in place, but before the Q2 earnings earlier this Summer they initiated a new $2 billion authorization, so that’s even better. And they have been actually buying shares back, not just authorizing buybacks — the share count has come down in recent years (they’ve authorized about $9 billion in buybacks since 2011… I don’t think they’ve bought back quite that much, and they’ve probably been dumb like every other company and did more buybacks when the stock was higher and cut buying back stock when their shares were dropping, but the buyback authorizations are real).
Recent actual performance, however, has been a little bit weak — competition in glass, particularly LCD glass for televisions which accounted for almost all of their profits in their best years, has brought their margins down a bit over the last five years or so. The worst years were really 2012 and 2013 — and you can see that written in their stock chart, with a drop to the $10-12 area in 2012 that didn’t start to bump up until 2014 expectations began rising. More recently, the stock peaked near $25 back in February, and has come down sharply to the high teens, it’s now right around $17.50. And the drop wasn’t just because of the recent kerfuffle in the markets at the Summer’s end, the shares have been dropping steadily since late February.
Why? Well, light LCD glass demand and the strong dollar have caused them to miss either estimates or “whisper numbers” for the last two quarters, and the expectations for this year and next year have been cut by analysts. That will nearly always bring a stock down, and it seems that continuing hope for big new “upgrade cycles” in televisions continues to elude us… which, combined with the fact that tablet sales may suffer in comparison with (smaller glass demand) phone sales, and the expectation that the iPhone 6S and other new releases will fail to cause the same big spurt in glass volume demand for Gorilla Glass as the iPhone 6 might have, and you can see why expectations might be a bit lower. Glass is a volume business — Corning can charge a premium as they come out with each new stronger, lighter, more flexible or whatever iteration, like the new Gorilla Glass 4 that’s also antimicrobial (whatever that means), but the key is that they need more products to be sold, and if those products continue to have larger screens and demand more glass, that would be best.
I’m no expert on TV demand, but there’s no obvious boom in UltraHD or 4K TV sales yet — there’s some expectation that this might be the holiday season when the higher-resolution TVs actually convince a large enough number of people that the volume will bump up and the prices will come down, spurring more sales, so that’s one reason for possible optimism, but there’s still a huge amount of LCD glass capacity out there so it’s unlikely that margins will improve much there. And Corning has done well at getting customers for its Gorilla Glass, and continuing to innovate… and there has been an increase in demand for fiber optic cable and equipment, too, as more “fiber to the home” gets installed. But for a $20 billion company, it takes some substantial growth to improve numbers and move the needle… especially in a competitive business where the major competitors, mostly Japanese, have a currency advantage.
So… maybe the new iPad Pro, with its larger 13″ screen, will help spur demand for glass by a little bit, but that doesn’t mean GLW will double this year. The positive spin is that GLW is indeed pretty cheap — they have a great balance sheet, so there’s no pressure from debt, they have a very solid market-leadership business in LCD TV