Large Cap Commentary – January 2011
Piles of snow this month have coincided with piles of earnings. Through the middle of January and extending into February, most large companies report fourth quarter and year-end results. As has been the case over the past few quarters, the preponderance of earnings and revenues reported thus far are better than expected.
Brown Brothers Harriman (BBH) provides summary data for the market as companies report results, and as of February 4, 2011, 62% of S&P 500® companies had reported. Of that group, nearly 72% had positive earnings surprises. Excluding financial companies, on a granular basis, operating earnings per share rose 20.2% year-over-year. We believe this is a testament that businesses are realizing the benefits of operating leverage as the economy recovers.
For most companies, part of this leverage was obtained in late 2008 – 2009 as the economy emerged from recession. Much of the earnings increase witnessed at the time were a function of expense cuts, including massive layoffs. While these actions provided bottom-line stability for companies reeling from the recession, the long-term sustainability of expense reductions is finite as businesses cannot continue to cut endlessly in order to drive profitability.
For this reason, we have sought out companies possessing organic growth opportunities in the belief that those companies maintain a more sustainable business model, thus increasing odds they will execute their business plans successfully. Corning Inc. (GLW) is a new name to the Argent portfolio that fits this framework of organic growth. GLW provides glass for television manufacturers. Its business grew as the world shifted from cathode ray tubes to flat screens; however, the growth driver for GLW has slowed with the penetration of flat screen televisions. The potential new leg of growth for GLW is “Gorilla Glass”, which, according to Gizmodo is, “an unscratchable, unshatterable material used as a protective window for your mobile phone, PMP, or laptop display”. While that description of the product might sound geeky and irrelevant, what caught Argent’s attention is the revenue potential of Gorilla Glass. As shown in the graphic, for a company with $6.6B in revenue, the potential of a $1B – $4B revenue increase over three years from one product represents a material increase.
While we cannot know whether GLW’s revenue estimates for Gorilla Glass will be high or low, we do know that the company has a new and unique product offering servicing the smartphone and handheld device market, both of which are experiencing considerable organic growth rates. In addition, GLW is trading below its five year average relative price/earnings multiple, with a growth rate set to accelerate. With an organic catalyst for growth and a compelling valuation, Argent believes GLW represents a favorable investment for our clients. As always, we appreciate your interest in Argent Capital Management and hope you will mention our name to others.
Sincerely,
Ken Crawford
Senior Portfolio Manager
Views expressed herein represent the opinion of the portfolio manager as of the date above and are subject to change. Not all Argent clients may own each stock discussed in this overview. Argent portfolio managers may recommend the purchase or sales of these and other securities for their client’s acounts. A list of all stocks recommended by Argent during the past year is available upon request. Past performance is no guarantee of future results.
