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Corning Inc. (NYSE: GLW), sometimes referred to as Glow-Worm on the Street, is a specialty glass products manufacturer. Since its inception, Corning has evolved from a small bulb maker into a multinational corporation with over $5B in revenue and $1.8B in profit.
Just a few years ago, Corning may have been written off as yet another casualty of the tech bubble. By 2000, the company received ¾ of its revenues from its telecommunications division due to intensive capital spending to expand internet coverage. By 2003, the tech spending had evaporated and massive over capacity drove the company to the brink of bankruptcy.
Since near disaster in 2003, Corning has made an impressive recovery, riding explosive demand for LCD technology. Corning develops the glass substrates that are the key components in LCD displays. Increasing demand in this area has propelled earnings growth of 40% to 50% for the past few years and promises continued growth in the future. The company’s advanced technical know-how and patented technology has allowed it and its subsidiaries to grab a staggering 60% share of the LCD glass market.
Corning also has several other promising prospects. Its telecommunications division looks to benefit from renewed telecom spending for high bandwidth FTTP networks. Additionally, the company recently introduced two new diesel engine filters which should benefit from more stringent emissions regulation. Finally, its new Epic drug detection system promises to help large pharmaceutical companies identify effective drugs.
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[edit] Company History
Founded in 1851, Corning has a storied 156 year history. Corning began its impressive track record of designing innovative technology in 1879 when it designed the glass to house Thomas Edison's lightbulbs; the company went on to create the first process for the mass production of light bulbs. In the following decades, Corning continued to innovate in technology, designing the first glass lenses for high powered telescopes, eventually designing the lens for the Hubble Telescope. In 1970, Corning would go on to develop the first fiber optic wires capable of transmitting information over long distances. The introduction of fiber optics revolutionized information technology over the next three decades. By 2007, Corning's operations had evolved from bulb making to designing liquid crystal displays for television and laptops, fiber optic networks and optical biosensors for drug discovery.
[edit] Corporate Overview
Corning has four primary business segments. The first, Display Technologies manufactures the glass substrate that is used in the production of liquid crystal displays. This division has been the primary driver of the company's recovery and earnings growth after near bankruptcy in the wake of the dot com implosion. Corning's second division, Telecommunications produces optical wiring and other hardware for telecom companies. The third division, Environmental Technologies produces ceramics for emissions, primarily for automobiles. Finally, Corning's Life Sciences division produces laboratory products such as cell culture dishes and Pyrex pipettes. In addition to its four business segments, Corning is also partnered in several joint ventures. The most profitable of its joint ventures is Samsung-Corning Precision (50% owned) which also manufactures glass substrates used in LCDs. The company also runs a joint venture with Dow Chemical named Dow Corning (50% owned) which produces silicone and other semiconductor products. Finally, Sumsung-Corning (50% owned) produces cathode-ray-tubes for conventional televisions. Corning's holdings in these joint-ventures contributed substantially to Corning's earnings in FY 2006. Although their revenue is added to the company's financial results they produced an addition $960M in additional earnings.
[edit] Display Technologies
Corning's Display Technologies division makes the glass substrates that are the main component in liquid crystal displays (LCDs.) These liquid crystal displays are used primarily in notebook computers, flat panel desktop monitors, and LCD televisions. The Display Technologies division is Corning's crown jewel. Over the past decade flat screen displays and LCDs have become increasingly affordable and have entered into the mainstream. Corning has been a driving force behind this increased affordability. In the past few years, Corning has continued to improve upon its own patented fusion manufacturing process which has allowed it to scale up its production of these glass substrates. In the past few years, Corning has continued to refine its substrate production process. Corning's increased scales have in turn allowed customers to make larger, lighter, thinner and higher-resolution displays more affordably. Corning's also operates a joint venture with Sumsung, Sumsung Corning, which manufactures glass substrates in facilities in Kentucky, Taiwan and Japan using Corning's licensed technology. The combination of equity earnings from this venture with earnings from Corning's Display Technologies division accounts for the lion share of Corning's earnings in FY 2006. The transition from conventional televisions and monitors to LCD displays has produced rapid growth in this division. In 2006, Display Technologies achieved revenues of $2.1B or 41% of total revenue. The division achieved profits of 1.6B in 2006.
[edit] Telecommunications
Corning's Telecommunications division produces optical fibers and cables and other equipment for the world's telecommunications industry. Telecommunications' fiber optic wires are the backbone of many local area networks, (i.e. home, campus networks) and long-haul and submarine networks (public providers such as large telecoms.)The company's telecommunications division can be divided into three segments: access, metropolitan and long-haul. In 2000, telecommunications crested at over 75% of the company's total revenues. At the height of the net frenzy, revenue was heavily concentrated in the long-haul networks which involves building out networks over long distances. At the height of the dot com/tech boom, Corning invested heavily in this division. When the bubble burst and technology spending dried up, Telecommunications almost drove the company into bankruptcy. The division now seems primed for a healthy rebound as increasing demand for broadband networks have increased demand for the access segment of Telecommunications. Telecommunications generated $1.7B or 33% of sales in 2006.
[edit] Environmental Technologies
Corning's Environmental Technologies division focuses on innovative solutions to reduce pollution and carbon emissions primarily in automobiles. The division centers on catalytic converters which reduce the toxicity of emissions in internal combustion engines. Catalytic converters perform this function by providing an environment in which toxic by-products will undergo reactions that result in more environmentally friendly products. Corning does not actually produce the physical converter, but rather produces the substrates that go into the converters and catalyze required reactions. Corning is a market leader in this segment producing substrates for most major passenger car companies. Although sales in Environmental technologies were only $615M in 2006 or 12% of revenues, the division has solid growth prospects.
[edit] Life Sciences
Corning's final division is Life Sciences which contributed only $287M or 6% of overall revenues in FY 2006. Life Sciences produces laboratory glass products under the Pyrex brand, as well as other laboratory research products. Life Sciences is most notable for the development of Corning's new Epic drug detection system. Epic will facilitate pharmaceuticals' screening process for effective drugs and has strong growth prospects.
[edit] Trends & Forces
[edit] Liquid Crystal Displays
[edit] Overview
The past decade has seen a fundamental transition from cathode-ray-tube (CRT) based televisions and computer monitors to liquid crystal displays (LCDs.) Corning has played a fundamental role in transition. The company produces the glass substrates that are the centerpieces of flat screen LCD technology. Since Corning entered the LCD market, it has continually improved upon its propriety technology for manufacturing, scaling it up its production of glass substrates. In turn, improved economies of scale have allowed Corning's major customers such as Sony, Sumsung and Phillips to produce larger, thinner LCD displays more cheaply. Lowered prices have allowed for significant market penetration and essentially mainstreamed LCD technology.
[edit] Corning's Key Advantages
- Corning's proprietary fusion technology is patented and is one of the most efficient ways for producing LCD glass substrate on large scales.
- Corning's fusion technology is only a reflection of its deep level of knowledge when it comes manufacturing glass based products. Corning's substantial intellectual capital allows it to keep up with the ever increasing demands for LCD glass substrates while maintaining attractive pricing and high margins.
- Glass substrate production is very capital intensive requiring substantial investments in facilities and research and development. Because of this large barrier to entry, Corning faces relatively little competition in the production of LCD glass substrates.
Corning's strong position and advantages in producing glass substrate have allowed it to capture a 32% market share or over 60% when Sumsung Corning Precision's market share is also tabulated.
[edit] Product Cycles
[edit] LCD TVs
Corning began manufacturing glass substrates for televisions in 2000 and, since then, demand for LCD TV glass substrate has grown explosively, driven by increasing demand for Hi-Def (HD) media. Despite over 40% in annual growth since it entered the LCD TV market in 2000, analysts predict that growth in LCD TV demand will continue to propel earnings growth in Corning's Display Technologies for years to come. Determining the current stage of the production cycle is key to calculating growth prospects in the LCD TV market. Early to middle stages in production cycles produce rapid growth whereas a maturing cycle sees slowing growth. According to analysts at Credit Suisse, LCD TVs have achieved only 18% penetration in the total US market. This low level of penetration indicates that LCD TVs will continue to enjoy robust growth.
Another factor driving earnings growth at Corning's Display Technologies is the demand for ever larger flat screen LCD displays. The growing average size of LCD displays acts as a secondary support for increasing demand for Corning's substrates.
[edit] LCD Monitors
Corning first began manufacturing glass substrate for computer monitors in 1997. Flat screen LCD monitors are now the single largest source of demand for Corning's glass accounting for over 50% of total sales. LCD Monitors are much further along in the production cycle the LCD TVs. Analysts predict that LCD has achieved approximately 60% total market penetration. Because of the maturity of this market, it is unlikely that Corning will continue to see dramatic growth. Instead, the LCD Monitor market is likely to track growth in the personal computer division as a whole which may range between high single digits to low double digits.
[edit] FTTP Networks
Corning's Telecommunications segment is currently enjoying some of the highest levels of technology and capital spending since the dot com boom in the late 90's. Whereas capital spending in the dot com boom was fueled primarily by long-haul networks which ran over long distances to allow internet connectivity, today's capital spending focuses providing access through FTTP (Fiber to the premises) technology. Recent years have seen bandwidth intensive internet activities such as online video, VoIP, and data streaming strain antiquated copper-based networks. In response, large telecom companies, including Verizon and Nippon Telegraph and Telephone of Japan, have implemented massive infrastructure upgrades that connect houses directly by fiber optic networks. Verizon's FiOS network has already been delivered to over 3 million customers. Verizon eventually hopes to have up to 15 million customers. The tremendous expansion of Verizon's FiOS network bodes well for Corning as it currently has over 50% market share of the optical fibers used in Verizon's network. Corning also produces optical fibers for Japanese telecom giant NTT which has already wired 15 million customers and eventually seeks to reach up to 30 million.
[edit] Emissions Regulation
Corning looks to benefit from increasingly stringent emissions regulations in US and European markets. Corning first began manufacturing filters and converter substrates in 1976 in response to the Clean Air Act. Three decades later, Corning is experiencing renewed demand for its filter products among increasing global warming concerns. In particular, Corning sees high growth prospects in the market for diesel engine substrates.
[edit] Diesel Engines
Skyrocketing oil prices are making US consumers take a second look at diesel fuel engines. Although diesel engines have typically been perceived as dirty and inefficient in the US, they are actually 30% more fuel efficient than their gasoline peers. In Europe, where gasoline prices have been comparatively higher than in the US, diesel engines have achieved a 50% market share. Despite advantages in fuel efficiency, diesel engines produce much more in emissions. Corning's filtering technologies are integral in allowing diesel engines to meet emissions requirements. Corning has developed two groundbreaking products for diesel engines: the first, a new converter substrate for diesel engines and a new filter for capturing diesel emissions. Corning predicts that increasingly stringent emissions requirements will drive growth of sales of these two products in the years to come.
[edit] Comparison to Competitors
[edit] LCD Glass
Corning has a dominant position in the LCD glass substrate market. Corning’s dominance stems from several factors. The primary force is the company’s vast experience in the glass manufacturing. This experience has allow Corning to develop its own patented fusion technology which allows it to produce larger, thinner, defect-free glass affordably for its customers. Corning’s dominance is further protected by the capital intensive nature of glass substrate production which has limited the field of competitors. As of 2005, the company had a 60% market share of LCD glass substrate. The above graph demonstrates that Corning's advantage in higher quality glasses is even more pronounced with a 73% market share
[edit] FTTP Networks
Corning also has a strong presence in providing fiber optic wiring for new high bandwidth FTTP (Fiber to the premises) networks. Corning has produced 50% of all the fiber used in Verizon’s new FiOS initiative. The company’s cost effectiveness may expand this market share as Verizon continues to expand its network and may also attract other large customers like AT&T
