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At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
Warming to Corning
"We expect Q4 to mark [a] return to positive EPS growth for [Corning (NYSE: GLW ) for] the first time in two years as a result of stabilizing LCD fundamentals following several quarters of supply discipline." So saying, and so predicting, an analyst at Goldman Sachs sent Corning shares soaring yesterday -- and for a most remarkable reason.
For years, the bull thesis for Corning went something like this: CRT TVs are DOA. Everyone's going LCD these days, and Corning is the world's biggest manufacture of ultra-thin glass used to manufacture LCD television sets. So if LCD TVs are good news for retailers like hhgregg (NYSE: HGG ) and Best Buy (NYSE: BBY ) -- a fact that's come into question as a result of Amazon.com's (Nasdaq: AMZN ) "showrooming strategy" -- they're absolutely wonderful news for Corning.
As I said, that's how the thesis has gone in the past, but yesterday, Goldman turned this buy argument on its head, arguing that the real reason to buy Corning is that it's now less dependent on LCD glass sales than it's been for years.
I can see clearly now
Goldman argues that since 2009, when Corning derived 96% of its income from LCD glass sales, the company will soon reduce its "dependence on LCD glass" to a mere 74% of net income. Combined with lower capital spending, Goldman sees Corning growing its free cash flow yield (that's FCF, divided by market cap) "to 6% from 4% in 2013."
Now, that's quite a string of numbers I've thrown at you. Let's take a moment to ponder what they mean -- and most importantly, whether they mean what Goldman says they mean (that Corning is a buy).
What the numbers mean to you
Over the course of the past 12 months, Corning has generated $1.1 billion in positive free cash flow from $7.8 billion in sales. That's about a 14.7% free cash flow margin on the firm's revenue -- impressive, even if it's a bit less impressive than the 28.6% "net profit margin" the firm reports based on GAAP accounting. For context, though, $1.1 billion is also about a 5.9% "free cash flow yield" on the firm's market cap, and therefore, within spitting distance of the 6% FCF yield that Goldman has made key to its investment thesis.
As a result, if you read between the lines, what Goldman really seems to be saying is that after cutting its FCF yield to a mere 4% -- generating less cash -- the company is going to go boffo on cash production, grow the number by half, and wind up right back where it started at 6%. Right where it sits today.
You call this a buy argument?
I don't. Goldman does. If you ask me, though, a 6% free cash flow yield really isn't all that impressive. The more so when achieving it in the future seems to imply only a return to what Corning is already doing today.
And what is Corning doing today? Generating $1.1 billion in trailing free cash flow on a $19.4 billion market cap, the shares currently cost nearly 18 times annual cash production. That's quite a high price for a company that Goldman hopes will eventually return to growing its earnings -- but that most analysts agree is more likely to be stuck at flat earnings over the next five straight years.
Long story short, while Goldman thinks this is a great stock to buy, I think Corning is likely to be "dead money" for years -- but that's just my opinion. If you want more details on where the best place is to invest in the LCD TV supply chain, take a look at the Fool's two new premium research reports, and compare for yourself the merits of an investment in LCD glass maker Corning versus the attractions of LCD TV seller Amazon.com.