Why Is Corning Distorting?

Is Corning (NYSE: GLW  ) crazy ... or just trying to drive us insane?

Its new "Gorilla glass" product has Corning expecting to reap $300 million in annual revenue from this single product line – already an integral part of certain Samsung cellphones and the new Dell (Nasdaq: DELL  ) Adamo laptop -- within just a few years. Corning expects products for controlling emissions in diesel engines to do even better, topping $500 million soon.

Elsewhere in the company, Corning CFO Jim Flaws boasted this morning of improved demand for LCD glass in the fourth quarter, and "and an improved outlook" for 2010. October LCD TV sales leapt 45% year over year, according to the CFO, with China in particular posting astounding, triple-digit growth for the month. That's helping to keep glass supplies "very tight" -- and Corning's profit margins fat.

And I have to say that much of this tallies up with what we've been hearing elsewhere in the tech sphere. Barnes & Noble (NYSE: BKS  ) is apparently having trouble just keeping up with demand for its Nook e-reader. Amazon.com (Nasdaq: AMZN  ) , a big seller of Kindles, flatscreen televisions, computer monitors, and other LCD-intensive products, got a bump in earnings estimates from Goldman Sachs (NYSE: GS  ) last week. And on the shipping side of the supply chain, positive news out of FedEx (NYSE: FDX  ) suggests retailers may be stocking (and selling and profiting from) more TVs.

But I ask you: If everything's going great guns for users of Corning's sales -- especially for its signature product line, and presumably for Corning itself -- why is the CFO cashing out?

Flaws in the bull thesis
Just a few days before issuing his bullish prognosis on Corning's future, Mr. Flaws cashed out some 115,000 stock options, netting more than $800,000 in profit in the process. This follows a 100,000 share-dump in November. And while it's true that insiders sell shares for many reasons, one of those reasons might be that they think the shares are due for a downturn. In that case, it's worth considering that according to the insider-trading specialists at Form4Oracle, Mr. Flaws' sales have historically been predictive of downturns in the stock.

Now, I do not mean to imply that Corning's CFO is doing anything improper here -- nor that he is acting alone. As it turns out, selling shares seems to have become quite popular among Corning insiders of late -- as a group, they've reduced their ownership of the company by some 11% over the past six months alone. Is there something going on at Corning that might contradict the generally bullish tone Flaws took today?

As a matter of fact ...
In the course of discussing all the good news at Corning, Mr. Flaws did let slip a few less optimistic prognoses. For example, the telecom business is tracking toward a 10% to 15% sequential decline in Q4, and Corning expects further declines in 2010. And although Corning sees a bright future for its Environmental segment in years to come, this year, Q4 revenues should be sequentially flat against Q3. (Still, that flat sales expectation is still an upgrade to previous guidance.)

Mere quibbles, you say? Potholes on the highway to profits that Corning's built in the LCD glass industry? Actually, I agree. Within the Corning zoo, Display Technologies remains the 800 lb. gorilla, accounting for nearly half the revenue booked throughout Corning's five separate main business segments.

Valuation matters
But as I've argued so many times before, even great businesses like Corning eventually reach a valuation at which the stock becomes unattractive. There are admittedly arguments in favor of Corning being undervalued, and reasons for discounting the insider sales as insignificant? But with a P/E pushing past 18, free cash flow all but nonexistent, and long-term growth posited in the low teens, there are also good reasons to beware buying this stock. 

Until we see insiders showing a bit more interest in owning it themselves, I'd suggest you pay less attention to their words, and focus instead on their actions.

Fool contributor Rich Smith does not own shares of any company named above. Amazon.com and FedEx are Motley Fool Stock Advisor selections. Dell is a Motley Fool Inside Value picks. The Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 09, 2009, at 6:51 PM, Fool wrote:

    One explanation could be that Corning leadership is only exercising stock options about to come due and getting the most they can for them as much of their compensation plans are variable.

    Rich

  • Report this Comment On December 09, 2009, at 8:34 PM, Fool wrote:

    The Motley Fool is trying to measure free cash flow that is not available because of Corning's international businesses. Your logic needs to be reevaluated. Free cash flow is a US number for US reporting purposes.

  • Report this Comment On December 09, 2009, at 9:02 PM, mgdunton wrote:

    If Mr. Smith doesn't own any shares, is he short GLW? Why the great interest?

  • Report this Comment On December 09, 2009, at 9:23 PM, rvav8or wrote:

    How would it look to the SEC if GLW execs presented these positive comments and then sold the stock?

    Given their incomes, it's pretty obvious that their taxes are going to increase next year - if I were them I'd sell this year too.

  • Report this Comment On December 09, 2009, at 11:23 PM, TMFDitty wrote:

    @Fool: I am not sure I follow your logic. If you are saying that foreign firms do not report their cashflow... well, some are a little less quick about it, reporting it annually rather than quarterly. But many foreign firms report cashflow figures regularly -- some firms are actually *more* diligent than U.S. firms about including such information in their earnings releases.

    @mgdunton: No, no short position either. As for the "great interest," I interviewed the CEO some years ago (http://www.fool.com/investing/high-growth/2005/12/02/corning... and have been interested in Corning's story ever since. Great company; dominant products; consistently weak FCF.

    I keep a close eye on the company, hoping the FCF picture will improve at some point. So far, I'm still waiting.

    Foolish best to all,

    TMFDitty

  • Report this Comment On December 10, 2009, at 9:40 AM, Fool wrote:

    Why is Mr Smith distorting? Coming off the worst downturn since the great depression:

    -Corning 's PE is 18, but their 1 yr forward PE is 12.

    -The motor vehicle business tanked. Can you think of a reason why adoptions of new Diesel business might have slowed? Hmmm?

    -The construction industry tanked. Any possible connection to FTTH not taking off?

    -And is now the time you'd expect new technology like green laser applications to be launched?

    Just where are you coming from Mr. Smith, with your drumbeat of Corning bashing?

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