Dan laid out the fundamental and technical bullish case on GLW about 3 weeks ago in his CotD post:
One stock that caught my eye this morning was GLW, the flat panel glass maker for smartphones, tablets and TVs (with a slew of legacy telecom equipment businesses). The stock is not one that you hear about too often as it is not that sexy of a company hailing from the small town of Corning in upstate New York (right in my backyard growing up outside Syracuse). The analyst community is fairly mixed on the company with 10 Buys, 12 Holds and 1 Sell with an avg 12 month price target of $16.50.
The main cause of the earnings declines over the last couple of years has been the collapse in glass pricing due to overcapacity, but if current Wall Street estimates are correct, this could be abating, causing earnings to be flat this year and growing next year at high single digits.
The stock currently trades at ~10x next year’s expected earnings, below the average for the last 10 years. They have a quarter of their market cap in cash, 16% net of debt, a large share buy back and pays a dividend that yields 2.7%.
Well, less than a week later, GLW announced a deal with Samsung that locked in GLW as Samsung’s supplier for LCD glass through 2023. In return, Samsung received $1.9 billion worth of GLW preferred shares and invested an additional $400 million for more preferred stock (not convertible for 7 years). GLW’s board also approved a $2 billion share buyback.
The stock shot up to 2 year highs on the news, on huge volume. Since then, the stock reported relatively lackluster earnings on October 30th, moving a bit lower. It sold off hard yesterday, down 4.4%, on news that AAPL was partnering with GTAT for a new manufacturing facility in Arizona to make sapphire materials for the screens on Apple products.
Corning has been a major supplier for AAPL products with its Gorilla Glass product. This article back in June detailed the threat to Gorilla Glass from Sapphire-related materials, concluding:
Sapphire glass is a possibility, yet it is still not cost-effective for mass production of smartphones. Corning’s innovation will continue to help the company maintain its leadership position in the mass smartphone market. However, as the innovation continues to evolve, investors should definitely keep an eye on the new technology developed by companies, such as GT Advanced Technologies, whose share price increased nearly 50%, while Corning only advanced 25% YTD.
Yesterday’s announcement concerned GLW investors since it indicated that Corning might be falling behind relative to GTAT in the glass technology realm.
However, how important is Gorilla Glass to Corning as a whole? GLW is a very diversified manufacturing company, with interests in fields as diverse as telecom, environment, and life sciences. Yet, the bulk of the company’s revenues and earnings come from its LCD display business, which supplies screens to the TV, desktop, and notebook market. From the company’s most recent 10-Q:
The Gorilla Glass business is part of Specialty Materials. About 70% of net income in 2013 has been from Display Technologies, and only about 12% from Specialty Materials. In that sense, though the threat to Gorilla Glass is real, the real driver of Corning’s business is Display (again, LCD glass, meaning not for mobile phones). The other businesses are legacy businesses with much lower margins and a minimal impact on the overall bottom line.
With that in mind, the cleanup in the overcapacity in the LCD market over the past year sets the stage for a better environment for Corning in the next 2 years. GLW’s close relationship with Samsung in Display also likely helps it in future business for Samsung Mobile. While AAPL might be shifting more towards sapphire materials in the future, the threat to GLW’s bottom line in the interim is not significant.
As for timing, the stock’s retracement this week offers a decent entry point:
The technical setup here looks quite attractive. The stock broke out of a long-forming base on big volume, and has retraced back to near the prior high (at $16.43 in May). GLW is still a cheap company, priced at around 13x with 10-15% earnings growth expected over the next 2 years. The Samsung partnership solidifies a crucial business relationship.
This is a spot where the risk/reward looks quite attractive for a long delta structure that anticipates a move to a new high over the next few months:
TRADE: Bought GLW for $16.47
We simply bought the stock for our investments. However, we wanted to present an alternative using options that we also found worthwhile, though did not do ourselves.
ALTERNATE TRADE: Buy the GLW ($16.47) Feb 15/18 risk reversal (sell 15p, buy 18c), collect 0.02 credit
Break-Even on Feb Expiration:
Profits: Collect 0.02 between 15 and 18. Profits above 17.98, with no max gain
Losses: Unlimited below 14.98
The main benefit of this trade structure vs. just owning the stock is that we are of the opinion that the next 10% in either direction is rather equal probability, but we view the likelihood of a move of 10%+ on the upside as much more likely than a 10%+ move on the downside, given the fundamental valuation and the benefit of the recent partnership. In that vein, we like the risk reversal as a defined risk way to get long the stock above $18 or below $15, with no premium at risk to start. This structure if only appropriate for those who are willing to take delivery of the stock if it is below $15 on expiry.
We chose pure long stock because we want the freedom to trade options around the position, and are comfortable with the downside risk given the cheap valuation and the stock’s technical setup.