1 Stock to Buy in October

There's a stock in the market that just seems too good to be true.

Track record? Try 160 years.

Growth opportunities? How about a chance to profit off the megatrends in smartphones and tablets, the solar industry, and China? Seriously.

Dividends? Check.

A cheap price? At half of its 52-week high, it's trading for a P/E ratio of less than six!

Are you excited? So am I. Keep reading and I'll share my research on the stock as well as a bonus report.

An underestimated innovator
If you invested through the dot-com frothiness, you may remember this company. But your remembrances would be almost as outdated as the work the company did with Thomas Edison on the lightbulb.

Corning (NYS: GLW) is a boring-sounding specialty glassmaker that is involved on the cutting edge of technology. A decade ago, the market went gaga for its optical fiber. Providing the backbone for the Internet is a sexy headline during an Internet bubble. In two years, Corning's stock price shot up from the single digits to over $100 a share.

Things have changed. As of Friday's close, Corning stock traded for $12.36. It still runs its optical fiber business, but its cash cow is the glass it provides for LCD panels for televisions. Its growth prospects lie in a few key areas:

  • The Gorilla glass that, according to industry sources, acts as the touchscreens in Apple's (NAS: AAPL) iPhones and iPads.

  • Glass technology that General Electric (NYS: GE) showed increases the efficiency of solar panels.

  • The expansion of its LCD business in China.

Yet gone are the high expectations and 180 earnings multiples. What we have is an underestimated business with enhanced pricing power and prospects.

What the market thinks
The market doesn't beat down a stock without reason. Actually, it does. Often. But let's give it the benefit of the doubt and see what the fears are for Corning's future.

Corning's glass can be found all over the place, from the applications we've already talked about to pollution control systems in cars to lab equipment to just about anything its customers want to pay it good money for. It specializes in solving difficult problems and is darn good at it.

However, when you look at Corning's financials by segment, it's clear that it is highly reliant on its LCD business. Once you factor in its non-wholly owned businesses, including its 50% stake in Samsung Corning Precision Materials, the LCD division makes up over half of sales and almost all the profit.

Why does the market care? Because it fears that the wave Corning's been riding is about to hit shore. LCD sales have shot up as folks have been upgrading to flat-screen and/or high-definition TVs. That boost won't last forever. Add in competitive threats from technologies like OLEDs, a tenuous economy, and pricing pressure from Corning's customers, and we can paint a stark picture of falling volumes and falling margins. The market certainly has.

Why I'm bullish
Let's hit volume concerns and then pricing. Ignoring short-term turbulence, the LCD market is still expected to grow over the coming years. Just at a lower rate. Industry watcher IHS iSuppli projects LCD shipments will increase from just under 650 million units in 2010 to closer to a billion in 2014.

Any projections deserve a grain of salt, but the thing to note is that, despite what you'd guess from Corning's stock price, LCD volumes may actually go up in the medium term. That said, Corning itself realizes the LCD industry, if not fully mature, is at least rapidly approaching maturity. It believes it can remain "a very profitable business" even as the industry matures and even as it methodically lowers its prices to its customers.

Remember that Corning has been able to keep up its pricing power and makes, as one analyst put it, "a very envious amount of money." A decade ago, Corning's glass made up less than 10% of the cost of a large television. Now it's over 20%.

It's always important to see who has the pricing power in a value chain. In retail, Wal-Mart (NYS: WMT) has it over its suppliers. Altria (NYS: MO) and Philip Morris (NYS: PM) have it over tobacco farmers. Yet, Corning's glass is so good that it has been able to keep up its margins despite falling television prices and panel makers who would love to lower their input costs.

In addition, as screens get thinner, Corning can do more with less glass. As one of its higher-ups put it, "We melt our glass in pounds and we sell it in square feet."

Bottom line, Corning's LCD business is stronger than the market believes it is.

Why I'm extra bullish
Then we get to the sexy parts of the business. While Corning keeps on keeping on in television and computer screens, it is investing in the future.

Corning has lasted 160 years because of its innovation culture. That's how you bridge the distance from Thomas Edison to Steve Jobs. It consistently and routinely spends on R&D, committing around 10% of its sales. On top of that, it is committing goodly amounts of capital expenditures to Gorilla glass, the scratch-resistant glass that allows you to occasionally drop your smartphone and live to tell the tale.

Corning thinks it could grow its output of Gorilla glass for smartphones by three to four times by 2014. On the tablet front, it's six times. And then there's the potential of LCD manufacturers using Gorilla glass to both strengthen their TV screens and add touchscreen features.

All this is why Corning believes it can grow its top line from $6.6 billion in 2010 to $10 billion in 2014. And why Corning believes it can crank out $7 billion in free cash flow by then.

This is a growth story I can get behind. Especially when the market is pricing Corning as a death story. I take additional solace that Motley Fool co-founder David Gardner has it as a "Best Buy Now" in his Stock Advisor newsletter.

As a bonus, there's the hidden opportunity for a massive dividend. Corning currently pays a decent 1.6% dividend, but given its net cash position of $3 billion to $4 billion and its future free cash flow potential, its CFO has hinted thusly: "What are we going to do with all that cash? I can tell you that the board has requested to discuss potential cash distribution options soon." Nice.

Corning could be a dividend monster in the future. To find some stocks that already qualify, check out our most popular free report. It highlights "one dividend stock for the rest of your life." Click here to read all about it.

At the time thisarticle was published Anand Chokkaveluowns shares of Apple, Altria, and Philip Morris International. You can follow his thoughts onTwitter.The Motley Fool owns shares of Wal-Mart Stores, Apple, Altria Group, and Philip Morris International.Motley Fool newsletter serviceshave recommended buying shares of Corning, Wal-Mart Stores, Apple, and Philip Morris International.Motley Fool newsletter serviceshave recommended creating a diagonal call position in Wal-Mart Stores.Motley Fool newsletter serviceshave recommended creating a bull call spread position in Apple. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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