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| The glass is half-full: Shares of Corning have enjoyed a nice pop this year thanks to strong sales of LCD displays. |
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NEW YORK (CNN/Money) – Quick. Name this year's best performing tech stock in the S&P 500.
Nope. It's not Apple, Intel or Texas Instruments. Are you sitting down? It's Corning (Research). Yes, Corning, which boomed and busted with the best of them during the dot-com bubble on the back of its fiber optic cable business.
Shares are up nearly 24 percent this year.
That should come as a big surprise as other telecom-equipment firms have struggled because of the consolidation craze among telecom carriers -- investors worry about just how much carriers will be willing to spend on equipment.
Lucent (Research) has fallen 23 percent. Ciena (Research) is down 36 percent. And JDS Uniphase (Research) has plunged 54 percent.
Raise a glass
But there's more to Corning than fiber optics. After all, the company's ticker symbol is GLW...as in glassware.
And even though Corning warned on Tuesday of potentially lower demand in its telecom segment, its glass business is booming thanks to strong sales of liquid crystal display (LCD) glass used in laptop computers, desktop monitors and, most notably, flat-screen televisions.
Corning reiterated that it expects unit sales of glass in the second quarter to be up between 10 percent and 20 percent from the first quarter.
People apparently really love big, flat honking TV sets. "Folks 'get' the idea of a potential mania on flat panel televisions and that Corning may be one of the few successful large cap ways to play the trend," Pip Coburn, global technology strategist with UBS, wrote in a recent report.
Fortunately for investors, Corning's stock doesn't have a mania-like valuation. Even after this year's runup, shares trade for just 20 times 2005 earnings estimates, a multiple that seems more than reasonable considering that earnings are expected to increase at a 20 percent clip a year, on average, for the next few years.
What's more, earnings estimates have steadily risen for 2005 thanks to healthy demand for glass. Analysts now expect Corning to post earnings per share of 73 cents in 2005, up from projections of just 57 cents three months ago.
Out from the "junk" yard
Corning, like many other telecom equipment firms, is still trading well below the levels it hit during tech's glory days in the late 1990s and early 2000. When telecom spending dried up following the bubble's burst, Corning's sales and earnings suffered.
So in some respects, Corning still has the taint of a fallen angel to it, which has probably caused some investors to shy away from the stock. But as more investors begin to realize that Corning's fundamentals are back on track, this should lead to more gains.
"I get the feeling that over the next few years, Corning will be one of those sleeper stocks," said Jeff Pittsburg, an analyst with independent research firm Pittsburg Research.
Corning has also done a solid job of cleaning up its balance sheet during the past few years, which should also boost investor confidence. Corning currently has about $2.4 billion in debt, down from nearly $4.2 billion at the end of 2002. The company said it expects to pare down its debt load to about $2 billion by year's end.
And two credit rating agencies (Fitch and Standard & Poor's) upgraded their ratings on Corning's debt from junk to investment grade status last month. Such a move could significantly lower interest expenses.
Sure, a continued slump in the company's telecom business would be worrisome. But flat-screen TVs should continue to gain in popularity as prices begin to fall to more reasonable levels for the average consumer.
"The reason to own Corning is that they have a corner on the market in the highest quality glass for flat-screen TVs," said Henry Hewitt, manager of the Light Revolution fund, which owns the stock.
Corning said it expects LCD TVs will make up about 10 percent of the total TV market by the end of 2005, up from about 8 percent market share in the first quarter of this year.
And strength in glass should more than offset weakness in telecom. Corning's display division accounted for nearly a third of the company's total sales in the first quarter and two-thirds of its net income.
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