GLW - Corning May Offer Window of Opportunity

Corning May Offer Window of Opportunity
By SARA SILVER
WSJ, August 24, 2006

Corning Inc. shares plummeted this summer as the market slowed for liquid-crystal displays used in flat-panel televisions and laptops.

The Corning, N.Y., glassmaker's stock lost $13 billion in market value since April, ceding most of the gains made earlier this year amid optimism about rising demand for ever-larger flat-panel televisions.

Now some long-term stock pickers are finding this a judicious buying opportunity, believing in the strength of Corning's core LCD business as well as new products aimed at making diesel vehicles run more cleanly and speeding the discovery of new drugs.


With concern about the inventory buildup of the LCDs easing slightly, Corning stock has recovered somewhat, but remains closer to its 52-week low of $16.61 than to its high of almost $30.

Corning shares were at $20.79, up 24 cents, in 4 p.m. New York Stock Exchange composite trading yesterday, giving the company a market value of about $32 billion.

Corning shares trade at about 35 times earnings, compared with about 20 times for the Dow Jones Wilshire U.S. Telecommunications Equipment Index, of which Corning is a component.

"At the current stock price, we think of them as call options because we are buying on the display and telecom businesses, which we think are in good shape for at least the next six to 12 months," said Christopher Baggini, manager of the $500 million Gartmore U.S. Growth Leaders Fund and the $500 million Gartmore Growth Fund. "We think the stock could hit $30 if those call options work for us."

Mr. Baggini believes the display business has gone from a hypergrowth phase, which bucks seasonal trends, to high growth.

"Seasonality becomes your friend as you move into the second half of the year, with back-to-school and Christmas purchases, which is good for TV, laptop and flat-panel purchases," he said.

Mr. Baggini says he sold one-third of his 1.5 million shares of Corning in the second quarter at $25 and bought back the same amount this summer at $19. Overall, Gartmore Global Investments, based in Conshohocken, Pa., trimmed 338,000 shares of Corning in the second quarter, giving it a total of 3.4 million shares as of the end of June, according to FactSet Research Systems Inc.

Corning has reshaped its product lines in its 155-year history. When demand for fiber-optic cable bottomed out with the technology bust, Corning teetered on the verge of bankruptcy in 2003. The company climbed back by dominating the LCD-glass market, combining sophisticated materials science with a policy of placing big bets on a few technologies. The bets pay off when Corning's technology wins over customers, its high production volume keeps them fully supplied and its low costs allow competitive pricing.


"We place big bets on long, difficult technology developments for new systems," said Wendell P. Weeks, Corning's president and chief executive. "There are inherent risks in our business. We manage this volatility by continuing to build our financial strength as well as a healthy portfolio of cash-generating businesses in different, significant markets."

Within months, the company expects to see an increase in demand for ceramic filters for diesel engines, designed to meet more stringent emissions regulations going into effect in the U.S. in 2007 and the following year in Europe.

Although it expects transport companies to load up on trucks this year ahead of the regulations, Corning predicts its $370 million investment in factories in upstate New York will start producing several hundred million dollars of sales next year.

Corning estimates the global market for diesel filters will reach $1 billion by 2008 but won't say what share of that it expects. This fall, Corning is launching a technology it believes will help speed the process by which pharmaceutical companies discover new drugs by using electronic readers to more quickly find which compounds can target a particular disease.

"We think management is overly conservative, which we applaud, and think the market will be pleasantly surprised when second-half earnings are revealed," said Tom Walker of Martin Currie Investment Management of Edinburgh, Scotland. "All the evidence of the retailers points to strong demand for ever-larger screens, where Corning is the leader in providing larger glass."

Mr. Walker, product manager for the firm's global and North America portfolios, has bought Corning shares in recent weeks. The firm, which manages $21.4 billion in active equity portfolios, says it holds 763,593 Corning shares across its funds. The firm held 673,049 shares at the end of June, according to FactSet.

While two-thirds of Corning's earnings come from its LCD business, long-term investors also see new life in old business lines. In the second quarter, Corning's optical-fiber business, the company's mainstay before the telecom crash early this decade, contributed 8% of second-quarter earnings of $514 million.

Telecom companies "are upgrading their plants and trying to get fiber closer to your home -- that is very good for Corning," said Kevin Landis, chief investment officer at Firsthand Capital Management, of San Jose, Calif., which specializes in technology. "In developing countries where they are putting in fiber all over the network for the first time, that's a great driver as well," he said.

Firsthand's 1.9 million shares of Corning made up roughly 6% of its $800 million in assets under management as of June 30.

This attention to new and old product lines, while unlikely to move the stock in the near term, shows that the company is determined to insulate itself from cyclical downturns, whether in telecom equipment or consumer electronics, by diversifying its product offerings.

"The fact that they are paying attention to the market means they may have other rabbits to pull out of their hat," Mr. Landis said.

And that could only help the stock in the long term.