Recently I have seen a whole rash of articles predicting doom and gloom for Corning (GLW), based on their role as the manufacturer and supplier of “Gorilla Glass.” Gorilla glass is the stuff used for the screens of many mobile devices, iPhones in particular. Apple (AAPL) is increasingly appearing to be heavily invested in the possibility of sapphire technology to produce the next generation of screens for their devices, so, the logic goes, Corning is akin to a maker of 35mm film. They are about to be made redundant by technology.
Apple have provided financing for a GT Advanced Technologies (GTAT) sapphire plant in Arizona and there are plenty of rumors flying around. For example the iPhone manufacturer has recently filed for a patent on a process to coat sapphire with oil repellent, just what would be needed for a touch screen. Add that to the rumored release of the iPhone 6 later this year and the rumors that that will have a bigger screen and everything starts to come together.
The only problem is that all of this is based on rumors and a rudimentary game of join the dots. Apple already uses GT’s sapphire crystals for camera lens coating and for the fingerprint reader in the new phones, so their tie-up with the company makes sense. The jump from there to a new screen, however, and particularly a larger one than Apple currently uses, is a big one. Sapphire crystals are harder than Gorilla Glass and more scratch resistant. They are also heavier and, at least for now, more expensive.
I have no doubt that with Apple’s backing, GTAT will, to some extent, be able to overcome both of these problems. That doesn’t mean that they already have. If so, a small voice at the back of my head keeps saying, wouldn’t we have been told by now? It seems more likely that this is just Apple investing in a technology with the possibility of future use. Those that bought GTAT at below $10 at the start of the year made a great investment but even for those smart people, some profit taking may be in order.
The bet back then was on a later adoption of the sapphire technology and that possibility still remains. At these levels, however, a contract with Apple is baked into analysts’ estimates, yet GTAT is still trading at a forward P/E of over 50. Such a deal is also, so it seems, priced into the stock. Combine that with a company that is still losing money every quarter and I find it hard to get enthusiastic.
That said, any positive announcement would cause a significant pop, so if you bought GTAT cheaply and want to hold on for that possibility, have at it.
Given where we are right now, however, I would rather buy Corning (GLW).
GLW has also had a great year, increasing by around 60% in the last 52 weeks. This increase has been a little steadier than GTATs and has been based on the boring old reason... increased earnings. Incidentally, if I may be allowed to brag a little, this was something that I predicted back in 2012, but tempting as that makes it to recommend taking a profit here, GLW still looks like reasonable value.
Firstly, despite that good performance, the stock price still hasn’t caught up to Corning’s increased earnings. At a 13.74 forward P/E and 15.69 times the last four quarters earnings the stock still looks reasonably priced. Secondly, Corning is not a one trick pony. They manufacture a lot of fiber optic, LCD screen and other glass products. Management is particularly bullish on future sales for TV screens. They believe that increase may be accompanied by a drop in margins as prices come under pressure, but, once again, at under 14 times forward earnings doesn’t look like the market has priced in any real increase in volume.
I know that picking GLW over GTAT isn’t sexy. We all want to be in on the next big thing and sapphire technology could be it. If so, then GTAT will one day look cheap at these prices. Where I have a problem is with those that act as if that day is upon us. Until it comes, I will always prefer a company that consistently makes money and has doubled its dividend since 2011. If, as I suspect may happen, Apple announces the iPhone 6 later this year with no reference to GT or sapphire screens, then GLW will be set for another good year and the stock will no doubt reflect that.