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Corning enjoys LCD rebirth, looks to future

Corning Inc, on the edge of bankruptcy in 2002, currently has a market value of about USD 42 billion. The return to profitability in 2005, the first earnings recorded by the firm since the telecoms ma…

Corning Inc, on the edge of bankruptcy in 2002, currently has a market value of about USD 42 billion. The return to profitability in 2005, the first earnings recorded by the firm since the telecoms market meltdown in 2000, was mainly thanks to becoming the world“s largest producer of ultra-pure glass for liquid-crystal-display panels. The company“s stock, which plummeted from USD 110 in September 2000 to below USD 2 in 2002, has more than doubled in the past year. Many investors believe the stock will continue its upward trend, pointing to declining production costs, continued growth of the LCD market and new technologies that Corning is set to roll out. “Corning has been a gratifying story and a spectacular rebirth,” says Kevin Landis, chief investment officer of Firsthand Capital Management of San Jose, Calif., which owned 2.3 million shares of Corning at the end of 2005, more than 7% of Firsthand“s USD 883 million portfolio, according to FactSet Research Systems Inc. Navellier & Associates Inc., which manages USD 5.1 billion, recently increased its holdings in Corning to 2.5 million shares from 2.1 million shares at the end of 2005. “We“ve had the stock for six months, and it had already had some of its run-up, but we want proven winners as opposed to bottom fish,” says portfolio manager Shawn Price, whose quantitative funds, based in Reno, Nevada, focus on stocks with rising prices and low risk. To secure its place in the supply chain, Corning builds its factories close to, and in some cases right next to, its Asian customers, enabling it to build to specification, deliver just in time and build strong relationships with companies like Sharp Corp., Samsung Electronics Co. and AU Optronics Corp. Mr. Landis also likes the fact that Corning asks customers to co-invest in plants, reducing the incentives for clients to exaggerate demand to lower prices and guarantee supply. Corning“s South Korean operation, for example, is a joint venture with Samsung. In 2002, Corning was close to filing for bankruptcy-court protection with a USD 2.2 billion convertible note falling due. Since then, it has tripled the size of its display-technologies business to 38% of sales and cut the percentage of revenue from telecom, which includes fiber-optic cable, to 35% from 52%. The company“s debt is now investment grade. John Harmon, telecom-equipment analyst at Needham & Co., calls fiber optics “kind of a dormant business,” but which could wake up if demand rises from telecom carriers offering Internet television and other next-generation services. Mr. Harmon, who owns no shares, rates the company a “buy.” His firm owns no shares and has no business relationship with Corning. Risks that Corning faces include the saturation of the market and discounting of TV sets by retailers, putting pressure on manufacturers to demand discounts from suppliers. To evaluate those risks, Corning has a team dedicated to studying the market. Demand for flat-panel television sets seems strong, with TV manufacturers expecting worldwide sales of about 40 million in 2006, up from 21 million in 2005. In 2005 Corning recorded a USD 1.1 billion profit on display-technologies sales of USD 1.7 billion, a margin of 65%. Needham“s Mr. Harmon calculates that the company“s share of the LCD market is at least 60%, and that the firm trades at about 26 times its 2006 earnings estimates. Its patented technologies give it an advantage over competitors such as Asahi Glass Co. of Japan, which trades at a cheaper 23 times future earnings, Nippon Electric Glass Co. at 22, and NH Techno, whose parent Hoya Corp. trades at 27. “Corning has been perfecting its recipe for flat-panel display glass for 25 years, and its competitors would need to make an enormous investment to catch up,” Mr. Harmon says. By gambling large resources on a few technologies, Corning has entered new markets with large-enough volume to be the lowest-cost producer from the beginning. LCD glass is exceedingly difficult to produce: it is just seven-tenths of a millimeter thick, must be absolutely flat and ultraclean, is made in sheets as large as king-size beds, and it has no direct contact with people at any stage of production. In March 2006, Corning announced that it had found a way to make the panels without heavy metals such as arsenic that may come under stricter import and disposal regulations. The company hopes this will give it a competitive advantage. Looking beyond LCD screens, Corning“s next big hope is catalytic converters. It spent USD 300 million to build a plant in 2001, at least six years before the introduction of rules in Europe and in the US requiring lower diesel emissions by goods vehicles.

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