Corning Incorporated (NYSE:GLW) is a picks and shovels business for the 5G trend, the autonomous driving trend with more screens in the car where you don’t focus on driving any more but on entertaining and also on other glass uses like vaccines.
It is also a fundamentally sound business that has survived many crises. it is however a cyclical business with high capital investments needed to always stay at the forefront of technology with high initial margins that decline fast as the competition ramps up.
In a rare interview with Harvard Business School that was published online earlier this month, (it has since been taken down) value investor Seth Klarman spoke at length about his investment process, philosophy and the changes value investors have had to overcome during the past decade. Klarman’s hedge fund, the Boston-based Baupost has one of Read More
Nevertheless a stock to watch and perhaps nail the upturn when the huge buybacks will be reinstated. The company returned $20 billion to shareholders in the past where the current market cap is $19 billion. I will be following and covering the company in the future and then compare to other investing opportunities out there. Perhaps you wish to follow it too and I hope you like the analysis.
5G Stock, Autonomous Driving, Smarter Phones - Corning Incorporated (NYSE:GLW) Stock Analysis
Good day feel investors. Do you remember those stories about those gold rushes and all those people chasing gold hundred years ago? Well, some of them made money, but most of them didn't make money. Who made money always, were those selling the picks and the shovels to those in a gold rush to those looking for gold. And that are often the best investments. And today we're going to discuss modern day stock that offers the pick and shovel, not to the modern gold rushing people, but to the modern environment, to the modern trends, to the modern tailwinds that are creating gold rushes for many.
Tthat company is Corning Incorporated (NYSE:GLW). And we're going to give a business overview, we'll discuss the fundamentals. What does the company do? A few details about the company and also the investment perspective of it. So I'm giving you here a very interesting idea that I have also put on my covered list, also my large portfolio to follow and to see where this goes over the next 5-10 years, perhaps creating some great investing opportunities. I'm sure you're going to enjoy this report, we're going to discuss the product, the stock etc. If you enjoy this video, please click like, as there will be many more stock analysis videos, we do stock analysis videos, portfolio strategy, and also investing education that you can check also in my free course in the link in the description below.
Let's start talking about Corning Incorporated. They do corning gorilla glass, very high quality glass for many, many phone producers there and the more sophisticated that our phone get, the more there is the need for better and better glas. And we see here prices of glasses here from going from 50 cents per glass a few years ago to already $12. Similarly for laptop glasses, everybody's wanting more better, better quality, higher quality and this is what benefits companies that are making the picks and shovels for the current gold rushes.
Plus as they make glass, specialty glass, they also now launched velour glass to serve the vaccine industry because there might be need of higher demand for glass. So unfortunately, they're also serving that which might be something that works well for them but they also have a special division for health care products let's call it like that which is growing okay.
Also 5G, they have invented low cost optical fibre, they are investing 8% of their revenues into research, which puts them at the forefront of the industries and well positioned to take advantage of the industries cycles and opportunities. It is a risky interstate is cyclical industry, which also leads to an interesting risk-reward perspective, but later about that in the investment idea. They also plan to double sales by 2023 as more and more cars use more and more glass, more high quality glass, my car, it's a Mercedes 10 year old but it has plastic dashboard.
So as cars developed more into this, they plan to sell more and more of that glass. And that is also a good indication of the trends explore the company is exposed to. Of course fibre optic cables from deep ocean cables to those cables that go into the data centres that provide all the usage and the capacity that we are now especially using in this situation.
Now let's discuss the fundamentals. Let's start with the revenue. As it is exposed to interesting trends. It almost doubled over the last 10 years from 6.6 billion, there have been some acquisitions, we'll discuss that later, to 11.5 billion. Gross margins declined. But that also depends in what kind of business you are? Where you are expanding? There are some high margin business, low margin businesses, but 35% gross margin is still an interesting margin, even if it lowered operating margins from 21% to 11%. Net income has been very volatile. It's a very cyclical, very fast moving industry.
So you need to invest a lot which affects net income unfortunately, but something more important than net income perhaps, is what they did over the last 10 years. They almost half the number of shares outstanding from 1.6 billion to, let say this is diluted to 900 million or even 150 million less but more about that in the final detail. So operating cash flows, this is very important, have been between 4 billion even close to 5 and 2 billion per year. And they have invested a lot of those cash flows into future growth that they expect will lead to more cash flows in the future, allowing them to do even more buybacks and lowering the number of shares outstanding.
That should have a positive effect for investors but more about that when we discuss the stock. So something discussing the fundamentals now they expect the capital expenditures to go down from 2.3 billion, where they are now to 1.5 billion in the future and the maintaining in capex is 1 billion per year. This means that in a good year, as we have seen here the operating cash flows in a good year they can make between 1.5 and 3 billion in free cash flows to distribute to investors.
Given that the Corning Incorporated market capitalization is around 18 billion now, when I use the diluted number of shares, that's a good 10-15% return on the current stock price. So the fundamentals look interesting. And it's also in line with what they expect to deliver over the next four years. So cash flows from operations 16 to 18 billion. This is the current market cap. So they expect to make money in the next four years on an equal amount as the current market capitalization. They already have 5 billion in cash, which gives them financial strength, that have the money they make and have the liquidity they have.
They have to invest 10 to 12 billion into research and development as said 8% of revenues goes into that. So that's a good number. Capital expenditures 6 to 8 billion and then They also plan to maybe do some acquisitions if there is the opportunity. They plan to increase the dividend 10% annually, perhaps the plant will get delayed a little bit with the current situation. But this is what they are planning to do and what they have delivered in the previous four year capital allocation plan and do between 5 and 7 billion of share repurchases and return to shareholders between 8and 10 billion.
If they return 8 billion, 10 billion that's 50% return over four years. That's 10%, let's say return per year that you can expect in the form of cash flows through buybacks or dividends from Corning Incorporated. So very interesting fundamentals. Plus, they expect to grow sales by 6 to 8%, grow earnings per share by 12 to 15% and also invest into the future. So very positive, positive management as always a pleasant to some conference calls. So if they deliver on this with high return on invested capital, then this will end up as a good investment.
Let's discuss the stock, the final details, a little bit the risks and also the investment idea behind this. So the stock as you can see, it's cyclical, it depends for the demand for the products. When the market is negative, then the stock always goes down. When the market is positive and exuberant, then the stock is up. Now the market is again negative and the stock is down again. What I'm showing here is the company has been pretty active with buybacks over the last years especially when the stock was cheaper, which is always a good thing for shareholders.
Also they bought 2 billion also in 2018 when they pushed themselves the stock up, but okay, that is something normal with buybacks and you can't really predict where the stock will go. Unfortunately now that the stock is cheap, they have kept their buybacks temporarily. So, again, another idea when the buybacks restart, when the dividends restart, the stock might jump, just based on that speculation and buybacks.
It's a cyclical company. What does that mean? This is also shown here. When people were extremely exuberant, about the.com bubble, the optical cables and everything, the stock exploded, then it bottomed again. Then when economy is good, demand for products is good, it goes up again. Then, as the technology goes faster, everybody expects looks at the losses they make because they can sell what they created, invented, produced, created capacity to produce. So it's extremely volatile, but with cyclical so we have to look at the business prepare and understand when the uptrend uptrend might happen.
And if you can follow the uptrend, if you can nail that then you can make also a good investment, especially good investment into cyclical company. And when the demand for 5G, for glass, for autonomous driving, explodes in the coming years, then this might be again a very, very hot stock, like it was the case often in the past. But we have to be careful about the risks and all that can go badly and then time the entrance in a cyclical very, very well.
The Corning Incorporated market cap here says it's 16.15 billion, but there will be some dilution so I would say here that the market cap is 18 billion. The dilution came when they acquired part of SCP from Samsung and they made the deal, they issued 150 million shares convertible at $20. So that will push the number of shares outstanding higher and does also push the market capitalization higher by a few billion. Now this is also something very interesting. Corning Incorporated is a company that issued 60 year bonds. So they have recently issued a 60 year bond and a 30 year bond. You see here, the due date in 2057 and 2079.
So they have really spread out the maturity of their loans, betting that there will be inflation in the future that will make these repayments a real bargain. However, they have to pay a higher price for that, you can see 30 year issued note it's just the 3.9% interest payment, on the 60 year it's 5.54. The longer the maturity the more investors want to be paid now. But is very interesting for this bet on higher future interest rates the management has done.
Now on the investment idea. Corning Incorporated have spent 20 billion on buybacks cumulative on a market capitalization of 19 billion. So they made the money and they paid it back through buybacks if they make again 20 billion, and they spend them on buybacks on 19 billion market capitalization. That means that the stock will likely double even if the market capitalization might stay the same. So from a shareholder perspective, if you want to find the business that will double in price, then this might be an interesting investment idea, because if they have, again, the number of shares outstanding, the market capitalization might stay the same, but the stock might double so they have strong buybacks. They have high investment in research, they have quality businesses, servicing many many.
We have seen buyers there that we probably use. However, it's a cyclical all those sectors are cyclical, and the key is to nail the upturn. High capex business requirements, highly volatile, fastly changing environment. So you might spend a lot of money like they did in Korea, and then suddenly it becomes cheaper to produce television screens in China. And they have now to ramp it up invest again. Te factories in Korea will not be used as planned. And that's the risk and that's why you see all those volatility in the stock price.
However, when there is a good environment, the cash flows are high. So you can expect stable cash flows but volatile, but if they come to the 20 billion or 2 billion in free cash flow per year, that's a good investing environment. And therefore, also that can happen given the interesting tailwind exposure on cash flows 10% return is expected in a normal environment, we have to see what kind of environment we will see ahead. So you They hit their expectations, higher dividends repurchases, I expect a dabble in the stock price in the next few years, especially as this situation passes and that would be the investment idea.
However, I just bought a little bit of Corning Incorporated to put it into my portfolio where I really watch carefully what's going on. And then I'll see compared to other businesses that I have, and then I'll see when this is a great business for now I'm learning I'm learning about the risks the rewards, learning more I will be listening to the conference call learning more about the competition. And that's how you know something you start to know a business better and over the years you start understanding and you know when to push the pull the trigger and buy more if it is the best opportunity out there.
I found it very interesting business. Happy to share it here. If you want to read my research on this, you can check it on my website and my stock market research platmform and also check there everything that I do that might perhaps give you some value, from research, from the book, from my free stock market investing course, where I'm now preparing a video on how to pick the right broker. If you found this interesting, please subscribe, click that like button. I'm looking forward to comments, any ideas that you have any comments on this company that you have, please share them in the comments. Thank you. See you in the next video.