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Corning Goes Prime Time

Post Time:Apr 07,2009Classify:Company NewsView:349

To the surprise of just about everyone, sales of LCD flat-panel televisions have stayed healthy around the world amid the worst economic downturn since the Great Depression. February unit sales of LCD, or liquid-crystal-display, TVs rose 39% in the U.S. from the year-earlier period, according to the consumer research outfit NPD Group. Sales in Japan rose 30% year over year. Europe posted a 49% gain, and China a 109% leap - both based on January data, the latest available, from BCN Ranking, a consumer electronics research group in Japan.

Scott Pollack for Barron´s
That demand, coupled with sharply curtailed inventories of glass and glass panels used to make LCD TVs and monitors, is creating a nice reversal of fortune at the world´s premier maker of specialty glass: Corning (ticker: GLW). The nearly 160-year-old company, which has a market value of about $24 billion, now expects to report a profit in the first quarter, excluding special items, compared with a previous break-even forecast for the quarter.

Corning, which supplies the glass for more than half the LCD market and derives about 90% of its net income from those sales, now expects its total glass volume for the first quarter to be flat to down 5% - a sharp contrast to its earlier forecast of a decline of 20% to 25%. The company cites an increase in glass orders at both its wholly owned business as well as its Samsung Corning Precision Glass joint venture, based in Seoul.

Though worldwide sales of televisions are expected to fall this year by about 4% - the first significant decline since the energy crisis in 1975 - Corning sees LCD TV sales rising by about 9%, as these sets, increasingly more affordable, take market share from the bulky cathode-ray-tube televisions that suddenly seem so old-fashioned.

With business trends firmly on the upswing, expect a rapid acceleration in orders and profits at Corning in the second and third quarters, says Jeff Evenson, an analyst at Sanford C. Bernstein. Last week he raised his 2009 earnings estimate for Corning sharply higher, to 94 cents a share from 65 cents, versus $1.53 in 2008. His estimate for 2010 remains unchanged at $1.11 a share.

Longer term, and as economic recovery takes hold, Thornburg Investment Management portfolio manager Connor Browne sees Corning´s earnings reaching a run rate of $1.50 a share annually. Attaching a normalized multiple of 15 to those earnings would value the stock at $22.50 a share, or 50% up from the current level of about $15.

At recent levels, Corning trades at a multiple of about 16 times Evenson´s estimated earnings for 2009 and 13.7 times 2010 projections.

Be forewarned: Corning is up about 60% from the start of the year and has risen more than 100% from its Nov. 21 low of $7.36, so the shares likely will be susceptible to some profit-taking.

Bolstering the company´s outlook are improving utilization trends at the set-assembly and panel-making companies in Asia. Taiwan´s average factory utilization rates jumped to 40% in February, from a low of 20% in December. Rates in Korea came close to hitting 80% in February, from under 50% in December.

A report last week in Digitimes, which tracks developments in Taiwan´s information-technology industry, noted that AU Optronics and Chi Mei Optoelectronics - two important Corning customers - are expanding their LCD panel capacity to meet demand driven by China´s new subsidy program for consumer electronics in rural areas.

IN ANOTHER SIGN OF THE TIMES, the giant U.S.-based electronics retailer Best Buy (BBY), in reporting better-than-expected fiscal fourth-quarter results, noted that it underestimated demand for flat-panel televisions and was caught off guard with low inventory levels. Promotional pricing by retailers and America´s conversion to digital broadcast signals spurred sales to unexpected levels.

Corning does face challenges: The slowdown in consumer spending is still an issue, and price wars are always a threat. The company´s other businesses, providing optic fiber to the telecommunications industry and emissions control systems to the automotive industry, remain under intense pressure amid this severe economic slowdown.

Nonetheless, Corning is well positioned to ride out the slump. Management, led by Chief Executive Wendell Weeks, wasted no time in implementing a "ring of defense" plan last fall to protect the company´s financial health, reducing production, adjusting compensation, lowering capital expenditures, eliminating positions and offering early retirement to workers. Corning has $2.8 billion in cash on hand, compared with debt of about $1.6 billion, and expects to end the year with positive cash flow.

The company has proved especially strong at managing its inventory, paring it by some 40% and idling plant capacity to avoid buildups.

Not for a minute is Corning retrenching. Instead, it is hoping to use its financial strength to make strategic acquisitions in areas that would add to its revenue and income and provide some diversification from the LCD glass business. One possible approach: buying the half of its Dow Corning joint venture that it doesn´t already own from Dow Chemical. The venture owns 63% of Hemlock Semiconductor, the world leader in polysilicon production for the semiconductor industry and the fast-growing solar market.

Clearly, this is a company investors should stay tuned to.

Source: Corning Inc.Author: shangyi

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