Corning Inc has a tradition of reinvention. Starting in the mid-1990s, it abandoned traditional businesses like branded cookware to become the world's leading supplier of fiber optic cable -- and a Wall Street darling.
But with the telecommunications industry in a deep recession and showing few signs of quick improvement, Corning, which once made the glass for Thomas Edison's incandescent light bulbs and is now 152 years old, is retooling itself again. It has cut costs sharply, aiming to regain its lost profitability and to help weather the industry's slump. And it is betting on businesses that it expects to achieve high growth, like the manufacturing of refined glass used in flat-panel computer and television screens.
Investors have liked what they have seen in recent months. Though Corning shares, now at US$5.43, are at a tiny fraction of their split-adjusted level of US$113 in August 2000, they have risen 64 percent this year -- the seventh-best gain in the Standard & Poor's 500, according to Bloomberg Financial Markets.
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"Wall Street has agreed with us and our stock price has continued to climb back," said James R. Houghton, the chairman and chief executive, in his address at the annual shareholders' meeting on April 24.
Analysts attribute the gains primarily to the cost-cutting campaign, which has resulted in the closing of 13 plants and the layoff of about 18,000 workers in the last two years. At the height of the telecommunications spending boom in 2000, the company had a work force of more than 40,000.
Other telecommunications companies, like Lucent Technologies and Nortel Networks, have also engaged in painful downsizing amid waning demand after a huge buildup in infrastructure to transmit voice signals and data by phone and computer.
Though Corning has had eight consecutive quarters of net losses, attributable largely to its heavy exposure to telecommunications, it appears closer to returning to operating profitability. On April 22, it reported that it had a net loss of US$205 million in the first quarter. But excluding costs related to continuing restructuring charges and an asbestos litigation settlement, it broke even after taxes. That is US$0.03 a share better than analysts expected, according to Thomson First Call.
Company executives predict that Corning may be profitable, excluding restructuring costs, by the third quarter -- or even in the current quarter. Including restructuring costs, they say, it will return to profitability by next year, helped in part by a slow rebound in the telecom business late in that year. Over the past year, the company has also reduced its long-term debt to US$3.7 billion from US$4.5 billion.
But can Corning's stock price, which bottomed at US$1.10 in October, keep climbing in the coming months? Analysts aren't sure. Though John Harmon at Needham & Co has a buy rating on the stock and a price target of US$8 over the next 12 to 18 months, he conceded that the "stock isn't dirt cheap anymore."
Enterprise value
Steven B. Fox of Merrill Lynch recently calculated that the company's enterprise value -- which combines its market value and debt before subtracting its cash -- is 21 times its Ebitda, for earnings before interest, taxes, depreciation and amortization, for 2004 and about 2.8 times sales. These multiples are higher than Corning investors have paid in recent years, he said.
"Value investors would have a tough time buying the shares with these kind of multiples," said Fox, who has a neutral rating on the stock. "I'd say that the company will bounce around at its current levels over the next 12 months."
Fox said the stock could exceed his expectations if Corning meets the high side of its goals in glassmaking for flat-panel screens known as liquid crystal displays. Corning creates the refined glass used by Asian makers of flat-panel computer monitors and TV screens.
The company has said it expects annualized revenue growth of 20 percent to 40 percent from this business through 2006 as more consumers switch from bulky cathode ray tube monitors to the sleeker LCD screens. Corning is the leader in making LCD glass, with a market share of roughly 50 percent.
Corning pioneered glassmaking for conventional color TV screens, but it said recently that it was leaving this business in North America. The company, however, will continue its Korean joint venture with Samsung, which is focused on the Asian consumer market for conventional TV sets.
Gabriel Lowy, an analyst at Blaylock & Partners, said he did not think Corning could live up to its revenue projections for the LCD business, because of price competition. "I think that their revenue growth will be in the 15 to 20 percent range," said Lowy, who has a sell rating on the stock.
He is also skeptical about the company's projected growth rates in other businesses, including the making of ceramic materials for catalytic converters used to reduce automobile emissions. Many analysts worry that global economic weakness could cause a severe slowdown in auto production.
Still, it is clear that Corning is spreading its bets over several technologies rather than remaining largely tied only to telecommunications. "Despite the fact that Wall Street wanted us to be a pure-play company, that's never been our plan," said Houghton, during a recent telephone interview.
Don't even say the word "takeover" to Houghton, the great-great-grandson of the company's founder. He said that remaining independent was one of the company's core values. Analysts view a takeover as unlikely, noting that Corning has chosen not to sell when it was more vulnerable.
Though Houghton stepped down in 1996 after 13 years as chief executive, the board drafted him to return to the job in April last year after the company descended into unprofitability. Many analysts credit him with making tough decisions necessary for turning around the company.
A self-professed "failure at retirement," Houghton, 67, has not said when he plans to step down again. Analysts say that they expect the change to occur in the next two years and that the replacement is likely to be Wendell P. Weeks, 43, the president and chief operating officer.
"Jamie Houghton is a man of action," Lowy, the analyst, said. "He's there to fix his family's company and hand it over."
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