The Corning Conundrum

Corning (NYSE: GLW  ) investors face a dilemma this week. Do we sell the stock based on miserable first-quarter results, or buy it in hopes that management is correct and matters will soon improve?

First, the bad news. Q1 2009 sales fell short of the $1 billion mark, down 39% from last year's Q1. With economies of scale evaporating, profit margins shattered, sending Corning's profits down 98% to just $0.01 per share.

But here's where it gets tricky. Despite these numbers, CEO Wendell Weeks pronounced himself "pleased with our first-quarter performance," emphasizing "continued strength of LCD TV sales at retail worldwide throughout the first quarter," and glass demand reviving "sooner than we anticipated, an indication that the display supply chain contraction was ending."

Huh?
If you see a disconnect here, consider how Corning suggests you bridge the gap. While it declined to give specific guidance on Q2's numbers, management did say that it expects:

  • "Sequential [glass] volumes at our wholly owned business to be up more than 50% [in Q2]."
  • "LCD TV units to grow 18% this year versus its original expectation of 9%."
  • It predicts that the global "2009 LCD glass market" will be 5% to 10% bigger than previously forecast, at "2.1 billion to 2.2 billion square feet."
  • "[I]ncreased volume and manufacturing capacity ... should [yield] considerable improvement in both the display segment's and the company's gross margins in the second quarter."

Last but not least, management boasted that its new touchscreen "Gorilla Glass" has been "designed into ... electronic devices ... from more than seven separate manufacturers." Corning's not naming names, but I note that Hewlett-Packard (NYSE: HPQ  ) has a touchscreen PC it's heavily promoting. And cell-phone makers Apple (Nasdaq: AAPL  ) , Motorola (NYSE: MOT  ) , Palm (Nasdaq: PALM  ) , Nokia (NYSE: NOK  ) , and Research in Motion (Nasdaq: RIMM  ) all make such devices today.

Assuming at least a couple of those manufacturers are using Gorilla Glass (there's no way to be certain right now), it should not matter which one dominates the market -- Corning should still win. Getting a foothold in touchscreen devices that boost productivity and have shown resilient sales during the economic slump is an excellent way to smooth out a business during LCD demand downturns.

But investors will still lose
Hopes for the future lifted Corning stock more than 3% yesterday, but with the stock now trading below pre-earnings prices, these hopes seem to be evaporating. Some might call this a vote of no-confidence in Corning's happy talk. Me, I think it's just a question of valuation.

By selling "existing inventory to meet the increase in glass demand" in Q1, Corning has now lifted its trailing free cash flow number (using cash flow from operations less capital expenditures) to $367 million. But this is still way, way less than the $4.2 billion in "net earnings" reported for the same time period. The resulting price-to-free cash flow ratio of 62 tells me this stock is overpriced, and has further to fall.

What did we expect out of Corning when it last reported earnings, and what did we get?

Read all about it in:

Fool contributor Rich Smith does not own shares of any company named above. Still. The Motley Fool has a disclosure policy.

Apple is a Motley Fool Stock Advisor selection. Nokia is a Motley Fool Inside Value recommendation.


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  • Report this Comment On April 28, 2009, at 7:42 PM, devilinside wrote:

    I agree with the valuation scenario and based on that factor the stock should still fall further in the coming months. I'll be watching for that and when it does, I'll step in and buy the stock.

    There was one intersting fact about corning for it's future left out. Corning is currently doing R&D work on a spun glass filtering system for the coal burning electric producers. Given Cornings past history of innovation and technological advances with glass I'm betting it will be a winner for Corning.

    It is still in the development stages but showing very positive signs. This technology will allow the filters to be retrofitted to existing power plant furnaces with a reduction tarket of 90% of CO2 emmisions. It appears that it will take 10 years to hit the market.

    Consider the ramafications such a filter will make on the coal industry and those that burn it. If you are a long term investor Corning looks very cheap.

    And once the economy begins to turn around The above mentioned glass products will produce nice proifits over that 10 year period.

    Corning made the mistake of relying to much on their glass screen tech with no new developments until now. I'll put money on Corning's labs to come thru with something unique and very much needed for the green future with otherwise dirty fuels.

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