Did you know that Corning (GLW), once a ho-hum housewares company, has been around for some 150 years? Well, Corning has evolved and grown to become a huge $28 billion giant. Apart from being a major maker of liquid crystal display (LCD) glass used in most electronic products such as TVs, PCs and cell phones, the company also produces ceramic substrates and filter products for emissions control, as well as high-tech fiber optics for worldwide telecommunications.
But what’s been creating some buzz of late are rumors that this global maker of complex products using advanced technology is now a takeover candidate. Some analysts believe it could attract an acquisitive private equity fund or corporate buyer seeking companies with strong free cash flow yield, hard-to-match proprietary products, and relatively depressed market valuation – and great potential for a turnaround.
“Corning is definitely worth a look as a possible takeover target whose free cash flow yield has been consistently high – currently at 10%, the highest of any major company, according to a Bloomberg screen,” says Stepehen Leeb, editor-in-chief of the investment newsletter, The Complete Investor.
“The right leadership could turn Corning into a dynamo, especially if it’s broken up into parts,” argues Leeb, who is also president of Leeb Asset Management in New York. Although its business fundamentals aren’t in their best position right now, “the company has good turnaround potential or could be easily transformed into a faster-growing vehicle. So the odds of a takeover are clearly very high,” asserts Leeb.
Shares of Corning have been on the rise since October 2013 when it traded at around $14 a share. On July 14, 2014, it hit a 52-week high of $22.37 a share. The stock hardly budged when the market tumbled on July 17, 2014 on shocking news that a Malaysian jetliner was shot down in Ukraine. It eased by about 24 cents a share, to $21.58, while the Dow Jones industrial average dived by more than 161 points, to 16,976.81.
Among analysts who follow Corning, six remain bullish on the stock, recommending it as “strong buy,” while 10 others rate Corning as a “hold.” Among the bulls are Zacks, which rates the stock as outperform with a price target of $27 a share, Argus Research, which recently upgraded Corning to a buy from neutral with a target price of also $27 a share, and Wamsi Mohan, analyst at Bank of America Merrill Lynch, who rates it as a buy. None of the major Wall Street houses has a sell recommendation on the stock.
What’s significant is that several major institutional investors continue to hold on to their big stakes in Corning, including Vanguard which owns a 5.3% interest, Dodge & Cox with 4.4%, State Street 4.1%, Loomis Sayles 4%, and BlackRock with 3.2%.
Some analysts believe Corning’s stock could drive up to much higher levels were it not for the company’s large stake in the commodity product LCD glass, which accounts for nearly 50% of its revenues. The market for LCDs are expected to continue growing but analysts worry that the market is getting to be more competitive. So even if Corning derived better-than-expected gains in unit sales, lower pricing of LCD glass could dramatically depress margins and lead to far slower growth.
However, the other 50% of Corning’s revenues come from several dynamic growth areas, rangng from cell phone glass to ceramic materials that reduce car emissions, and to proprietary photonic equipment used in telecommunications. “These product lines have the potential of growing by 15% to 20% a year and on their own would likely propel Corning’s multiple to at least twice its current level,” says Leeb.
The big positive about Corning’s LCD TV glass unit is its continued profitability and capability to generate free cash flow which, says Leeb, suggests that a sale or spin-off of the division would be feasible. “Indeed, a buyout deal could generate an immediate windfall for investors while making the company a far more attractive proposition,” says Leeb.
In the meantime, Corning remains financialy secure. At the end of 2013, Corning had $5.2 billion in cash and short-term investments and $3.3 billion of debt that mostly will mature after 2017. “We believe Corning can support its annual dividend increases with a dividend yield of 1.8% as well as its share repurchase program,” says Angelo Zino, analyst at S&P Capital IQ. Corning has spent some $2 billion in share buybacks,m reducing its shares ourtstanding to 1.3 billion from 1.4 billion by the end of this year’s March quarter. It has another $2 billion in reserve for further buybacks in its authorized repurchasing plan.
Corning has been busy in entering into a series of strategic and financial agreements with South Korea’s Samsung to strengthen a product and technology collaboration between the two companies. Samsung and Corning have been working closely on several projects, including a 50% interest in Samsung Corning Company, a joint venture that produces components for cathode ray tubes in television and computer monitors.
“We view positively Corning’s recently closed deal with Samsung and see potential benefits including a stronger balance sheet, cost synergies, earnings accretion, better earnings visibility with a 10-year supply agreement, and lower potential capital expenditures,” says Zino. Corning will also benefit from improved growth frorm the acquired assets and a solid strategic investor in Samsung,” he adds.
Indeed, Zino sees Corning’s core results improving, with an upside potential in the smartphone, tablet and specialty glass markets. He believes Corning has the “financial strength to weather challenges, including a balance sheet that supports dividend increases and a new $2 billion stock buyback program” that, says Zino, should offset equity dilution from the Samsung deal.
Is Samsung going to further expand its partnership with Corning to the point of eventually making a buyout bid for Corning? That’s part of what’s fueling speculation about Corning being a potential, if not an imminent takeover target. Stay tuned.