Barron's: MacAllaster likes Corning.
This has been a rough market, as a glance at the grim visage of any stray money manager you chance to stumble across will provide ample testimony, and it doesn't much matter whether the manager is young or old and handles the odd billion or a tiny fraction of that lordly sum. The standard yardsticks explain why: So far this year, the Dow, for all its huffing and puffing, has gone nowhere; that's still better than the S&P, which is down 4%, to say nothing of Nasdaq, poor Nasdaq, off some 11%. So why is that man smiling?
No, he isn't a dastardly short seller. Rather, he's our old buddy and stalwart Roundtable standby, Archie MacAllaster. And, as happens, in contrast to most of Wall Street's suffering humanity, Archie has found 2002 quite a rewarding year, indeed. And so have those who paid heed to his recommendations back in mid January.
Of his nine picks, no fewer than eight have appreciated, ranging from slightly over 8% for Honeywell Int’l to a resound-ing 35% for Frontier Oil. His sole turkey was something called ADC Telecom, which went from 5 and change to around 4. (Archie's a great stock picker, but unlike financial journalists, he's not infallible.) He did especially well with banks and insurance companies, which had as many fans at the start of the year as Mr. Sharon does in Gaza: Community Bank (up 24%), Old Republic (up 21%) and Radian (up a radiant 28%).
All of which seemed to us a perfectly reasonable excuse to ask him what he likes -- if anything -- right now. Corning, he said. Stop kidding, Archie, we said. Not kidding, he insisted. As quick as we could say ADC, we reminded him that Corning does a heap of business with telecoms, which is okay if you've always had a hankering to be a nonprofit enterprise.
Still, we did remember that Archie back in the good old 'Nineties bought Corning in the low teens, held it a few years, saw it take off like a rocket in the first half of 2000 and sold out at 178 pre-split; the stock, of course, promptly soared over 300 ... on its way to 18. Adjusted for a 3-for-1 split, the stock has been as low as 6 and change and, last we looked, was, well, 6 and change. That's down from over 71 as recently as 2001 (admittedly, early in 2001).
What sent Corning's stock into the stratosphere was optical fiber, the very same thing that brought Corning back to earth with a dreadful thud. Telecom demand for the stuff climbed mightily, but Wall Street's projections of such demand mounted to the very heavens. Seemingly eluding the ken of both the companies making fiberoptics and the analysts making the exuberant projections of demand was the fact that supply of the material was growing not only apace but a heck of a lot faster.
In a nutshell, when the stock-market bubble burst, delusions by the bushel were vaporized, including those of a geometrically expanding market for fiberoptics as far as the speculative eye could see. It didn't help Corning, either, that so many customers, actual and potential, effectively went down the tubes when their stocks did. In any case, management made a sober reappraisal of the optical-fiber business, and wound up taking a $4.8 billion charge in '01 for its pains.
Last week, moreover, the company reported a predictably punk quarter, losing $90 million, or 10 cents a share, on sales of $898 million, against a profit of 14 cents a share, on sales of $1.9 billion in last year's comparable stretch. The company wasn't exactly sanguine about the current quarter, either: It suggested sales might be a hair higher than in the opening three months, but profits (or, more precisely, the lack of them) would repeat the March quarter's dismal number.
The question, then, becomes simply: Has Archie lost his mind?
The answer, we're happy to say, is not yet. He points out that the company has been around for 150 years, has weathered some rough patches before and invariably has not only survived but prospered. The quality he cites that has enabled it to do so throughout its venerable history -- and the one that really turns him on -- is imagination, manifest most conspicuously in the company's tradition of diversifying into new businesses and unloading older ones. And its thrust has consistently been informed by technology, whatever that meant at any given time in the past century and a half.
Cheerful cynic that he is, Archie doesn't blink at the fact that management got swept up in the great bubble mania and temporarily shelved its customary conservatism. But, he shrugs, everyone's entitled to the occasional aberration. And, more to the point, Corning has paid the price, writing off everything, including the kitchen sink and the old Corningwear coffee pot on the stove. Its book value stands at $5.50, not much below where the stock is selling, and two bucks of that book is cash.
While fiberoptics remains No 1. in the product mix, Archie observes that 48% of the company's business is chipped in by its Advance Materials unit (specialized products, incorporating glass-ceramic, glass and polymer technologies, for various and sundry environmental and scientific applications) and its Information Display unit (liquid-crystal glass for flat-panel displays, among other things). And these operations are flourishing.
He takes gentle issue with the company and thinks that the second quarter's bottom line will show modest improvement over the March quarter's. The second half, he reckons, will be cash-flow positive, and next year, Corning will be back in the black.
The stock should be 9 by the end of the year (why do we think he's lowballing here?). Does he own the stock? You bet, and he bought it just about where the stock's trading.
Good luck to all.
Peter. |
