YCG Investments
“If you buy above average businesses at below average prices, on average, we believe you should come out ahead.” — Brian Yacktman

Is Corning’s Glass Half-Empty?

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It’s almost hard to believe that shares of Corning (GLW) have fallen to almost one-tenth of the price they fetched a decade ago, especially considering that since that time the glass company has almost doubled their earnings. Corning is one of the former darlings from the tech bubble that has suffered severe multiple compression over the past decade. Yet, as the pricing pendulum had swung too high in the past, it may have now dipped too low to ignore.

Corning’s revenues suggest a company with a wide diversity of segments including optical fiber for telecommunications, Pyrex glassware, automotive exhaust filters, and many others. However, their net profits suggest a different story. Nearly 84% of their profits stem from the sale of display glass that is found in TVs, PCs, tablets, and smartphones. This dependence on LCD screen sales has created uncertainty over their future earnings stream as the economy slows and forecasts of future sales have been reduced. Still, there is hope as the demand for high-end phones and tablet computers is still growing at a rapid pace, driving the overall demand for products such as Corning’s Gorilla Glass.

Regardless, Corning’s price has dropped too low to ignore. Currently, it trades at approximately 4 times operating income, so earnings could drop in half and the stock would still remain attractively priced. In fact, Corning currently trades below book value.

In addition to an attractive price, Corning also has a very strong net cash position on their balance sheet, as well as on the balance sheet of their subsidiary Samsung-Corning (of which they own 50%). Even if they face tough times, Corning won’t shatter to pieces since it is well positioned to weather the storm.

Clearly management sees the value in their company’s shares at the current price. Recently, they authorized an ambitious $1.5 billion stock repurchase program. Also, CFO James Flaws and board member John A. Canning Jr. have been scooping up shares for themselves as well. They’ve shown additional confidence in their long-term prospects by recently boosting the dividend by 50% from 20 cents to 30 cents, bringing the overall dividend yield over 2%. Shareholders don’t need to wait around to start receiving cash as they’ll be doubly rewarded through the combination of share buybacks and higher dividends.

While we do not claim to have a crystal ball regarding Corning’s future, their strong balance sheet and capable management are prepared for tough times ahead, should they arise. In the meantime, shareholders can take heart knowing that Corning plans to bring value to investors through share repurchases and dividends, and therefore we view Corning’s glass as half full.

Disclaimer: The specific securities identified and discussed should not be considered a recommendation to purchase or sell any particular security. Rather, this commentary is presented solely for the purpose of illustrating YCG’s investment approach. These commentaries contain our views and opinions at the time such commentaries were written and are subject to change thereafter. The securities discussed do not represent an account’s entire portfolio and in the aggregate may represent only a small percentage of an account’s portfolio holdings. These commentaries may include “forward looking statements” which may or may not be accurate in the long-term. It should not be assumed that any of the securities transactions or holdings discussed were or will prove to be profitable. Past performance is no guarantee of future results.

Posted by: Mike Yacktman | November 30, 2011 | Permalink

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