Hold Off Buying This Tech Stock

On Monday at the 2012 Consumer Electronics Show, Corning (NYS: GLW) revealed a new, improved version of its famed Gorilla Glass, the touch-sensitive screen glass found on so many of today's smartphones and tablets, to great acclaim. For an old-world industrial stalwart, the 160-year-old glass company has had a surprisingly good run in the tech arena, but last year the stock dropped off a cliff. What happened, and what can help it climb back up?

The curious case of Corning
As a refresher, Corning manufactures and processes specialty glass and ceramics products worldwide. In the display-technologies portion of the business, the company manufactures liquid crystal display, or LCD, glass for the flat-panel displays used in notebook computers, flat-panel desktop monitors, LCD televisions, and smartphones. 

As for Gorilla Glass in particular, though developed decades ago it came into its own only in the past five years, as the mobile consumer technology space has boomed. So far, more than 30 companies use it on more than 575 products.

From a strictly financial perspective for the company:

  • As of Sept. 30, 2011, quarterly revenue grew year over year, or YOY, by a staggering 29%.
  • Quarterly earnings grew a respectable 3.3% YOY.
  • Net profit margin was a whopping 39%.
  • Gross margin, a measure of brand strength and pricing power, was a solid 47%.
  • The company has $6.4 billion of cash on hand and $2.3 billion in debt, for a healthy cash-to-debt ratio of 2.78 (1.50 or more is ideal).

Corning's fiscal year just ended, so we can expect new numbers any day now, but as of three months ago the financials looked very good. However, why would a company with such strong financials and a foothold in one of the world's fastest-growing sectors be selling for $14 per share with a P/E of 6? Let's dig a little deeper.

You dropped a bomb on me
As it turns out, the fourth quarter held some surprises for investors. On a Nov. 29 conference call, the company dropped the following financial bombs:

  • Corning's joint venture with Samsung Electronics, in which Corning owns a 50% stake, would likely produce only 5% to 10% more glass in the fourth quarter than the third, versus an original expectation for a 20% or greater increase.
  • Corning said it would reduce its glass capacity in the fourth quarter to stem a buildup of unwanted supply. The company also said it expected to reduce its total glass-making capacity worldwide, both its own supply and that of the joint venture, by 25% by the end of the fourth quarter.
  • Corning said its sales of Gorilla Glass, its flagship product, would drop 25% from third quarter, worse than the company's original expectation for a 15% drop.

This lowering of guidance has been happening all year, which explains why the share price has been steadily tanking all year, from a high of $23.37 on Feb. 4 to where it is now. Why has guidance been lowered? In general, LCD screens have proved to be more of a commodity than a specialty. Also, demand for LCD televisions has been weak throughout the entire year, as evidenced by dramatically falling prices year over year and quarter over quarter. What, if anything, can turn things around for Corning?

Gorilla Glass 2 to the rescue ... maybe?
As I mentioned, Gorilla Glass 2 is an updated version of the original. Per the company's press release, Gorilla Glass 2:

  • Is 20% thinner than previous Gorilla Glass.
  • Enables slimmer, sleeker, and lighter devices.
  • Allows for brighter images and greater touch sensitivity. 
  • Still maintains the original's renowned damage resistance, toughness, and scratch resistance .

The good news for Corning is, Gorilla Glass 2 just won a major endorsement from Microsoft (NAS: MSFT) , which is making a big push into touchscreen PCs and tablets with soon-to-arrive Windows 8. Gorilla Glass was, however, most famously used in the original iPhone from Apple (NAS: AAPL) -- the company that led the smartphone and tablet computing revolution. However, because of Apple's tendency to use non-disclosure agreements with its iSuppliers, it remains to be seen whether the all-important tech giant now uses Gorilla Glass in its products.

While there's no official word yet that Apple will use Gorilla Glass 2, given the company's almost continual pace of product innovation, anything that could make an iPad or iPhone thinner, lighter, and easier to use makes sense to be adopted (Corning can only hope). An endorsement from industry-heavy Microsoft is great, but one from industry-innovator and -leader Apple would be even better.

Foolish bottom line
Smartphones and tablets aren't going anywhere, anytime soon; quite the contrary. And that is clearly Corning's best hope. If LCD screens for products like televisions are becoming more and more of a commodity, as it seems is happening, then specialty products like Gorilla Glass and Gorilla Glass 2 are what will drive growth, if anything, in the company and the stock price.

Since fourth-quarter results should be out any day now, your Foolish columnist recommends holding off on buying Corning shares for the moment, at least until we see said earnings and can assess exactly where the company has moved financially since its essentially sound third quarter. Pass the time waiting by reading up on three companies that are perfectly poised to profit from the tablet computing and smartphone boom we've just been discussing in this Motley Fool special free report, "3 Hidden Winners of the iPhone, iPad, and Android Revolution. Get your copy while it's hot.

At the time this article was published Fool contributorJohn Grgurichthinks Gorilla Glass might just be the coolest product name ever, but he owns no shares of any of the companies mentioned in this article. The Motley Fool, however, owns shares of Apple and Microsoft. Motley Fool newsletter services have recommended buying shares of Apple, Microsoft, and Corning and creating bull call spread positions in Apple and Microsoft. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has a scintillatingdisclosure policy.

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