Corning (GLW) could also be recognized for its Gorilla Glass and Pyrex manufacturers, however I consider one in every of its lesser-known manufacturers, Valor Glass, can be within the highlight going ahead. The world is in a rush to develop and mass-produce an efficient vaccine for COVID-19, however as soon as it is prepared, billions of glass vials can be wanted to securely transport and administer it. This surge in demand would require a big improve in manufacturing capability. Corning is among the few corporations with the potential to fill the additional demand, and I consider that can be an enormous enhance to its enterprise.
Firm Overview
Corning Inc., based 169 years in the past, is among the oldest and most acknowledged American corporations. The corporate is a number one innovator in materials sciences with a give attention to specialty glass, ceramics, and associated supplies. It has a number of well-known manufacturers, like Gorilla Glass, Pyrex, Falcon, Axygen, and others.
In 2019, the corporate reported complete gross sales of $11.5 billion, with 5 reportable segments: Show Applied sciences, Optical Communications, Specialty Supplies, Environmental Applied sciences, and Life Sciences. The corporate has a variety of merchandise and patents, in addition to a stable observe report with its R&D investments, which ought to translate into stable long-term development.
Amongst its most necessary merchandise is Gorilla Glass, which is utilized in a number of smartphones, together with the iPhone. In 2019, Gorilla Glass gross sales totaled $1,180 million (10.1% of web gross sales). With 5G deployment on the best way, many shoppers will look to improve their telephones, which ought to lead to greater Gorilla Glass gross sales. Corning will certainly look to capitalize on this new smartphone cycle. Nonetheless, I consider the most important catalyst going ahead would be the growth of its Valor Glass model.
Glass Vial Scarcity and Valor Glass
Glass Vial Shortages
Because the begin of the pandemic, the race to seek out an efficient vaccine has been in full steam. Nevertheless, even after they discover a appropriate vaccine and are capable of mass-produce it, there won’t be sufficient vials to retailer and distribute it.
Vaccine vials will not be simple to supply. They’ve to face up to chilly temperatures and survive the wear and tear and tear of being transported all over the world. Given the unprecedented surge in demand, a scarcity must be anticipated.
In a current whistleblower complaint, Dr. Rick Vivid (not too long ago fired head of BARDA) mentioned he had warned the Division of Well being and Human Companies of a “important scarcity” of glass vials. Within the criticism, he mentioned: “It may take as much as two years to supply sufficient vials for US vaccine wants.”
The US authorities is conscious of this drawback. It signed offers value $347 million with US vial makers to allow them to speed up manufacturing and hopefully keep away from shortages as soon as the vaccine is rolled out.
An HHS spokesperson advised Enterprise Insider that “the federal authorities expects home surge capability for vials over the following three years” and that the offers with US vial makers “have a efficiency interval of three years with potential choices extending out the settlement to 10 years.”
It is clear this would possibly not be only a one-year enhance for Corning. There can be a have to vaccinate billions of individuals all over the world in opposition to COVID-19, whereas additionally sustaining the manufacturing of vials for different vaccines. On high of that, some specialists consider two or extra doses per particular person of the COVID-19 vaccine could also be wanted to spice up and keep immunity.
Valor Glass and Life Sciences Division
In June, Corning obtained a $204 million grant from BARDA, with the aim of increasing the manufacturing of its Valor Glass vials. Corning is focusing on a rise in annual capability of three to 4 occasions by the tip of 2020. BARDA has tasked the corporate with rising manufacturing capability by ten occasions over the following three years.
The corporate’s newest earnings name can provide us a glimpse into the expansion of Valor Glass.
Wendell Weeks, Corning chairman and CEO, mentioned Corning and Pfizer (NYSE:PFE) had entered right into a long-term provide settlement to supply Valor Glass for at the moment marketed Pfizer medicine. This a giant win for the corporate, since Pfizer is among the world’s largest pharmaceutical corporations.
He was additionally requested if the present state of affairs had modified the corporate’s thought course of on the timeline for Valor to supply significant contributions to the enterprise. His reply was quick, but highly effective:
The straightforward reply Shannon is sure.
– Wendell Weeks, CEO
He declined to present exact numbers however mentioned the capability is rising very quick, and the corporate is on observe to attain its manufacturing enlargement objectives. He additionally mentioned that Valor Glass can be a big monetary driver in the long run.
Lastly, referring to the corporate’s Life Sciences phase on the whole, Mr. Weeks mentioned:
Our Life Sciences phase entered a number of long-term agreements with main clients for COVID-19 molecular diagnostic testing and antibody detection kits in quarter two. We’re seeing robust demand for these merchandise at the moment and we count on to speed up shipments additional within the second half.
For reference, in 2019, the Life Sciences division had web gross sales of $1,015 million (8.7% of complete) and a web earnings of $150 million (8.8% of complete). I consider this enhance in gross sales within the firm’s Life Sciences division is simply the beginning, and that it’s going to see important development even after the pandemic ends.
Regardless of that, the corporate is up simply 8% for the yr, in comparison with the S&P 500 with is up round 5%. Weak spot in different segments of the enterprise this yr will possible harm Corning’s backside line and offset a few of the beneficial properties of its Life Science division. Nevertheless, wanting into the long run, the opposite segments will possible get better, whereas the Life Sciences division will use the enhance from the pandemic to extend its measurement and drive sustained development.
Knowledge by YCharts
Strong Dividend Regardless of The Pandemic
Though my most important funding thesis revolves round development upside within the subsequent couple of years, it is also nice that Corning pays a modest dividend.
Proper now, the inventory has a dividend yield of two.71%. Whereas not an incredible yield, it’s nonetheless very stable within the present ultra-low rate of interest atmosphere. Additional, the corporate has been persistently rising the dividend for the final 5 years, with a development price of 14.87%. If it could sustain this tempo, the dividend will double in simply 5 years.
(Supply: In search of Alpha Dividend Abstract)
For some buyers, there may be issues concerning the firm’s capability to proceed paying the dividend, for the reason that payout ratio is round 74.37%. Nevertheless, that is principally because of the sharp EPS lower due to the early lockdowns.
For reference, in the beginning of 2020, the payout ratio was simply 47.39%. That’s what allowed Corning to keep up the dividend within the midst of the disaster, whereas a number of different corporations needed to minimize or droop their dividends.
Operational, Pricing and Market Threat
As with all funding, there are a number of dangers value taking into consideration.
Operational Threat
One of many largest dangers, in my view, is operational danger. Corning and BARDA have set lofty objectives for the Valor Glass vial manufacturing. That is an unprecedented state of affairs, and there is no certainty the corporate will be capable to meet its objectives. It has a number of years of expertise and know-how, so I like the chances. Nevertheless it’s nonetheless necessary to have in mind the chance that the corporate will not be capable to ramp up manufacturing and meet its objectives.
Pricing Threat
There’s additionally the chance that there can be important outdoors strain to maintain costs down as a lot as doable. Since Corning obtained a BARDA grant, and this can be a matter of nationwide and world well being, it is doable the corporate can be pressured into reducing costs considerably. This may considerably minimize margins and go away the corporate with little to no added revenue.
Market Threat
With the market at all-time highs, a dire financial state of affairs, an upcoming election, and different components, there’s a important danger of a giant sell-off within the inventory market. We noticed within the March meltdown that when the market takes a nosedive, nearly each single firm goes down with it. If a brand new downturn comes, my guess is Corning would additionally go down with it.
In case you are uncertain concerning the course of the market proper now however nonetheless like Corning’s upside going ahead, I’d advocate beginning a small place, so if the market falls, you should buy extra shares and decrease your common price.
Conclusion
Corning is among the oldest corporations within the US, however its continued innovation has allowed it to keep up a aggressive benefit through the years. The Life Sciences phase as a complete and Gorilla Glass could have robust demand going ahead, however I consider probably the most important catalyst for the corporate within the coming months can be its Valor Glass. The pandemic has accelerated the timeline of the product, and it’ll possible be a giant a part of Corning’s development going ahead.
Disclosure: I/we’ve got no positions in any shares talked about, however might provoke an extended place in GLW over the following 72 hours. I wrote this text myself, and it expresses my very own opinions. I’m not receiving compensation for it (apart from from In search of Alpha). I’ve no enterprise relationship with any firm whose inventory is talked about on this article.
