Corning (GLW) and Coherent (COHR): Old Tech Companies Still Worth Investing In
When we think of tech stocks, most of us think first of dynamic, young companies such as Facebook (FB: incorporated in 2004) or Twitter (TWTR: 2006). In reality, though, neither TWTR nor FB is really all that innovative. What they have done is found a different use for existing technology. Finding ways to monetize that technology is important, however, and for a company, making money is what counts. FB has proven itself to be very good at that and a lot of people are betting that TWTR will be too, but over the long haul it will be the ability of both companies to adapt to changing markets and new technology that will decide their fate.
This is not just a challenge for young companies, however. Continuous innovation is important for all businesses and older, more established ones regularly re-invent themselves as opportunities arise. Those that don't see the change coming go the way of Eastman Kodak, who couldn't find a way to leverage their brand in the world of digital and phone photography, while those that do adapt and find revenue from previously non-existent sources.
As this Forbes article points out, Corning (GLW), for example, believes in what they call "patient capital:" the value of continuous technical research and innovation even when there is no obvious short term application for a new product. What is now their best known product, Gorilla Glass, existed for decades before the smart phone industry that it now supplies. Sales of Gorilla Glass, according to that Forbes article, rose from 0 to $1 Billion in the five years following its adoption by Apple (AAPL) in 2007. Corning's stock, however, has hardly been a one way bet since that phenomenal growth began.
It is hard to remember, but in 2008, as financial markets imploded around the world we had no idea just how big the smart phone market was to become.
GLW was treated like any other traditional multinational manufacturing stock and hammered, losing around 75% in six months. It recovered somewhat and was then hit again in 2011 as fears about a slowdown in China combined with disappointing execution by the company to produce another bout of negative sentiment. 2013, on the other hand, was a good year for the stock, highlighted by the deal with Samsung announced in October.
Even with that jump and the overall good year, though, it could be that GLW is still undervalued. A current Price to Earnings ratio (P/E) of 15.1 and a Forward P/E of 11.74 both represent significant discounts to the overall market and, while I first recommended the stock below $13, I still believe it represents rare value in an elevated market at the current price just below $18.
Glass isn't the only area where innovation is changing the face of established technology and increasing applications. Coherent, Inc (COHR) operates in the world of "photonics based solutions" ... that's lasers to you and me. They are hardly a young company, having been incorporated in 1966. I have a natural aversion to any company that includes the word "solutions" in its self-description, but I'll make an exception in the case of COHR.
As you can see, the stock had a phenomenal last quarter of 2013, appreciating by about a third and hitting record highs. This would normally be another reason for me to avoid a stock as it would be reasonable to assume that all of the value in COHR was gone, but there is a Gorilla glass related reason that I expect the stock to outperform again this year. The company has a laser technology that solves the problem of cutting strengthened glass such as Gorilla, which is expected to move to commercial viability later this year. Fiber lasers are also a potential area of growth, with management targeting $10 million in revenues from the field in the coming year.
COHR has a forward P/E of around 19 and the estimates on which that number is based have been revised upward by many analysts, but there is still room for revenues to beat expectations. If that happens, then moves by the company over the last couple of years to reduce costs will pay off handsomely on the bottom line and the stock can continue the march up toward three digits.
Neither GLW nor COHR are the type of companies that spring to mind when most people think of tech stocks. Both are considered somewhat stodgy, old style manufacturing businesses... just the kind of thing that is being supplanted by the surge of money into Silicon Valley companies. Not all innovation, however, is in the trendy fields of social media and meta-data. Sometimes, good old fashioned research into new applications for old technologies pays off and that could be the case this year for both Corning and Coherent.