There is a giant bonanza coming Corning Inc.’s (NYSE: GLW) way, and it’s going to start hitting the company’s bottom line later this year.
What’s more, there is tremendous upside for the company’s stock that is not yet reflected at all in Corning’s share price. Corning is already surprising everybody – maybe even itself – well before any of this upside has materialized into tangible results.
Corning just reported a first-quarter profit of 10 cents a share, doubling analysts’ expectations. And that’s just beginning. The company raised growth estimates for its LCD television unit, which accounts for about 45% of revenue, to 18% from 9%.
Corning also confirmed the massive inventory liquidation, which means all of the industrial buyers of the company’s products have depleted inventories. You see, the first rule of financial management for a company is to always carry the lowest levels of inventory and receivables possible, because they have to be financed. And when financing becomes extremely difficult (or even impossible) to obtain, like it did last year, the immediate response is to cut inventories and reduce financing to the absolute bare minimum.
But Corning implied in its conference call and press release that inventory liquidation in the supply chain has run its course and that sales are actually starting to increase.
In fact, sales of display technologies, that is, the combined glass volume of its own operations and Samsung Corning Precision Glass were up 4% over the first quarter of last year. This is a result of continued strong sales of LCD TVs at retail levels, as well as the end of the supply chain inventory adjustment.
We are now likely to see restocking and inventory build-ups, as stimuli plans are deployed around the world. Hence, the pronounced dip that we’ve seen in Corning’s stock over the past year that was the product Wall Street’s doubts about the future has set the stage for a major rally.
Much like the endless upside of the high-tech boom of 1999 that was extrapolated by Wall Street to justify huge valuations, the inventory liquidations occurring in many high-tech industries were used to justify ridiculously low valuations in the current recession. This was another bubble, but to the downside. Let’s call it an “inverse bubble.”
I am strongly convinced that the conditions that underpin the global economy will keep improving because there are many powerful forces working in that regard. We are not out of the woods by any stretch of the imagination, but we have to recognize that the “TED Spread” – the difference between the interest rates on interbank loans and short-term U.S. government debt – and many other measures of confidence in the global financial system keep showing sustained progress.
But the economic recovery isn’t the only thing working in Corning’s favor.
The Global Broadband Arms Race
The real upside for Corning is the “global broadband arms race.”
Indeed, not a week goes by without us hearing that the United States ranks 15th out of the 30 countries that make the Organization for Economic Cooperation and Development (OECD) in broadband adoption. This is no joke.
But the competitive dynamics in this sector, which is of long-term strategic importance to every nation, point to a rosy future for Corning. Because the demand for the fiber-optic cable that Corning leads the world in manufacturing is about to take off.
Let me explain…
The United States already lags Europe in wireless: Many years ago I bumped into a British tourist in a train and he showed me the winning goal of his favorite soccer team in England on his mobile phone that he downloaded as we spoke. That type of service was unavailable at a reasonable price for U.S. subscribers, but his internationally roaming phone, which charged him a fraction of what I was paying for my bread-and-butter service made me feel like I was in an emerging market.
Today the penetration of wireless in Europe is more than 100%. That is, the Europeans have more than one wireless device on average. Likewise, a Chinese friend residing in Shanghai years ago bragged to me about how he could continue talking in elevators back in Shanghai, while in the United States his calls get dropped.
In the meantime, our friends “down under” in Australia just launched the mother of all broadband plans: Australia is going to spend a full $31 billion on a new, super-fast National Broadband Network that will connect every home, school and business. The Australian plan dwarfs the mere $7.2 billion allotted to broadband deployment in the U.S. stimulus package.
The gauntlet has been thrown down and the United States cannot stay behind.
Broadband access is not only a convenience, but it’s a key piece of infrastructure that enables connectivity for the entire economy. Lower broadband deployment, connection speeds and traffic volume capabilities, as well as higher prices, are a handicap for the U.S. economy as a whole. It lowers productivity and it breeds inefficiency in one of the most crucial avenues of economy: The transmission of information.
Whether we’re transmitting sound, images, video, or just plain data, without broadband, it all is for naught.
This handicap is a competitive disadvantage that the United States is giving away to other economies. Of course, it is much easier and cheaper to lay the infrastructure in much smaller countries where most of the population is agglomerated in high concentrations in multi-family dwellings than in an economy characterized by urban sprawl and many rural communities.
Soon, I expect to see the United States step up to the plate as it did when the Russians launched Sputnik. The country cannot continue to ignore this technological gap.
Though it doesn’t really matter which country is building its broadband information super-highways, Corning is the ultimate winner. The technological superiority of the company’s ClearCurve optical fiber cables eliminates much of the loss of signal that occurs when cables are bent.
The firm’s forward price-to-earnings (P/E) ratio of 5.48 is evidence of the very gloomy estimates by analysts. But given the dynamics of the broadband market, the higher penetration, and revived financing, it is highly probable that current earnings estimates will be blown away easily.
The stock has an upside of at least 60% to 70% to the $25 per share area in the next year or so.
Recommendation: We are looking to buy Corning (NYSE: GLW) at market and hold it for at least 18 months (**). So initiate a position today by buying one half of your total desired position, waiting to buy the rest (possibly even doubling up) if and when we see a correction in the markets. We will follow up at a later date.
(**) – Special Note of Disclosure: Horacio Marquez holds no interest Corning Inc.
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