Corning (GLW)

Decided to take a top-down approach to this pick. Started thinking about the trends with technology. Cloud computing, smartphones, streaming video.... More and more it becomes clear that internet usage will dramatically increase in the coming years, and we will need to upgrade bandwith. You can see it starting already with the war between cable and phone internet for fastest service. So I take it as a fact that bandwidth will become increasingly important.

Discussing this with a more tech savvy friend, we determined that the only near term solution for the next 15-20 years is Fibre Optic cable. While I would like to see more development in the wireless technology to avoid the massive cost of infrastructure update, it seems unavoidable.

Searching for a fibre optic company, I found Corning (GLW). My friend had also mentioned earlier in the day a technology called Gorilla Glass that provides a clear hard enamel used for small portable devices to add scratch resistance and durability that is being used in a lot of phones. When I checked it out, guess who it was made by.... Corning (GLW). So I figure this is a good sign and I should check out the stock.

Shares issued = 1.65B
Current Share Price = $13.44 per share
Cash = $3.88 per share (includes short term investments of $0.91 per share)
Book Value = $13.15 per share
Liquidation Value = $ 7.69 per share (50% write down on PPE and excludes all intangibles and accruals in assets)
Debt = $3.36 per share (pretty liberal interpretation of debt – only excludes AP)
Total Liabilities = $3.93 per share
Current Assets / Current Liabilities = 4.6 x
Interest rates on debt are between 5-6%. A little high, but not unreasonable for privately issued unsecured debt.
Earnings per share are $1.87 (13.9% return on current share price).

Pending legal issues look mostly settled according to the financial statement notes, but still leave room for roughly $1B in additional settlements if things don’t go as expected. Overall, I think this is a risk, but not a significant one.

SUMMARY: I like it for the industry, and the solid financials. The recent bankruptcy of Dow Corning due to Breast implant litigation might explain a lot of the recent decline in stock price as well as the exclusion of Gorilla Glass from the IPhone 4S. However, it is possible that Gorilla Glass could be used in the IPhone 5 and other devices. Their main business is LCD screens, and that should continue to do well. The fibre optic business does not have high margins (approx 10%) and is not a huge contributor to overall net income, but I like that it has exposure to this business. I like the 2% dividend which, based on the low payout ratio is not in danger of being reduced.

Trading: I think a $17-20 stock price is not unreasonable. This is at least a 26% gain over the current stock price.

I don't know for sure if this is the right stock, but anything to do with mobile devices and network infrastructure is the right industry to be in.

I think we are even seeing a huge shift from advertising driven internet to subscription based internet. Think about it. People use PVRs to record and fast forward through commercials, piracy is out of control and avoids commercials as well as any payment to the studios providing the content. Who profits? The internet service provider. All your downloading goes through them, they know who you are and exactly what content you are downloading. Why don't they stop it? Because they are profiting from it. Who is behind these pirating organizations anyway. Is it really a bunch of hacktivists that spread content out of a sort of organized altruistic anarchism (definitely a contraditction there)?

I don't know if there are adequate studies on this, but I just don't think mass internet based advertising campaigns are effective. When was the last time you paid attention to adds on the internet or through email. I think advertising budgets will shrink if they take the time to study the effectiveness.

The internet service providers are king in the new market dynamic. They get constant revenue from your monthly fees regardless of what you choose to watch. Content providers (movies, TV, music) are close behind them, but it will be a tough market since they have to compete for your attention. Content providers would likely offer package deals either to the ISPs or direct to the consumers in order to reduce risk of development cost of some show that goes nowhere, but who is going to watch advertisements when content is no longer live and delivered on demand.

I have never understood companies that depend on advertising revenue, because I have never responded to advertising. Despite the phenomenal success of Google, I still don't understand its business model. Internet Service Providers and content providers will likely converge in acquisitions. These mega companies will be the big names of the next generation. While hardware providers such as Apple will have some short lived glory, the concept of cool is fickle at best, and they will be prominent only as long as they continue to bring innovative ideas to market or they develop some kind of barrier that other companies cannot copy.

Invest in big telecommunication companies like AT&T, Sprint, Verizon, Telus, Bell, Rogers, Shaw, Time Warner (already merging the content and Internet Service provider functions by acquiring AOL), many others in their industry. These will be the future (especially those already dabbling with video based content). Just have to find out which one will be the biggest name.

Another angle on this is the convergence of all content to internet. Phone, video, music. This will eventually require a massive upgrade of the network infrastructure, and those companies making the investment will be owners of the Network. They will control the lifeblood of the internet, and will be in absolute control. Look through the list of names above to see which fall into this category as well. However, development in wireless technology if it advances at a fast enough pace could put these companies at risk of having pumped a massive amount of money into an obsolete technology. However, at the moment this doesn't seem to present a significant risk as far as I am told.

The network infrastructure expansion will be difficult to profit from. Many different contractors will be used and many of them will not be publicly listed. But the fibre optic cable (I am told this is the best technology available for the forseeable future) will be supplied by big names (such as Corning which is one of the big reasons I picked it). Cable companies that have innovation in making better fibre optic, or switches will do well.

Overall, tech, Tech, TECH. That is the place to be in this kind of market.

http://www.usatoday.com/money/advertising/story/2012-05-16/facebook-advertising-gm/55028654/1

Nearly 60% of Facebook users say they never click on ads or sponsored content, according to a new poll from the Associated Press and CNBC. Another quarter rarely do

Thats 85% of users who rarely, if ever, click on ads.

This is kind of what I am getting at. Facebook is a nice time waster for many people, and I will even go so far as to say that it is a useful social tool in some respects, but the monetization value I believe would come in the form of research reports based on user information facebook collects rather than from more direct advertising revenue. I just don't see internet based advertising as effective due to saturation. At least with TV commercials, there is a barrier to entry as they are expensive and relatively few companies can produce them, so you pay slightly more attention to them, but how difficult is it to produce a banner ad? However, in the age of on-demand content with fast forward and rewind capability, there are few consumers who pay attention to those ads either.

Continued research in this field will no doubt prove the diminishing returns from advertising as saturation leads to development of mental filters to ignore it. Advertisers are of course doing whatever they can to pretend like they still make a difference, and will struggle to come up with some new way to reach people.

In terms of long term value from advertising revenue, I believe Google & Facebook are worth very little.