Corning Incorporated Gets Upgraded... but Should You Should Care?

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." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.

But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our supercomputer tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the best...
One week ago, shares of television glassmaker Corning (NYSE: GLW  ) cracked under pressure from a SeekingAlpha columnist, who advocated the merits of GT Advanced Technologies' (NASDAQ: GTAT  ) "sapphire" glass over Corning's Gorilla glass for smartphones. One week later, shares of Corning are on the rise again (and GT is falling), as a "real" analyst makes the counterargument that, to the contrary, sapphire won't make a dent in Gorilla glass's market share.

The analyst making this argument today is Pa.-based Susquehanna International Group and, as related today on StreetInsider.com, Susquehanna sees a bright future ahead for Corning. Upgrading the shares from neutral to positive, Susquehanna notes that there's "a multi-yr TV replacement cycle" under way right now. Combined with lessened competition as the glass industry consolidates, Susquehanna sees this trend generating expanded profit margins for Corning -- with free cash flow margins potentially reaching 15% to 20%.

According to the analyst, Corning can sell Gorilla glass for about one-tenth the price of an equivalent surface area of sapphire glass. That might not make a huge difference when we're talking only about small-surface areas of glass, such as the camera lens on an iPhone 5S. But once you start talking about larger areas needing to be glass-surfaced -- tablet computer screens, for example, or the ever-expanding faces of smartphones -- that 10x price differential makes sapphire "cost prohibitive," and gives Corning's product a decided advantage.

But is Susquehanna right about this? Is Gorilla glass truly "scratch-resistant" against sapphire?

Let's go to the tape
Ordinarily, to gauge the quality of an analyst's forecasting, our best guide is its record of past success. Unfortunately, Susquehanna's record is a bit of a mixed bag. For example, although we've been tracking this analyst's performance for close to eight years now, we've yet to see Susquehanna make a definitive call on Corning stock even once. (Here... see for yourself.)

On the other hand, Susquehanna does have a pick on record for sapphire glass's biggest fan. The analyst picked Apple (NASDAQ: AAPL  ) to outperform the market way back in May 2009, has stuck with the stock through thick and thin -- and today, five years later, and after Apple's recent sell-off, Susquehanna is still sitting atop a 228-point win with the stock.

Overall, across 301 stock picks made during the past eight years, Susquehanna has gotten only about 51% of its stock picks right -- yet still managed to outperform the S&P 500 by 18 percentage points per pick, including wins and losses combined.

Success in Susquehanna's future?
Will they do it again with today's Corning pick? It's hard to say.

Priced at 15.4 times earnings, growing earnings at 13%, and paying a 2% dividend yield, Corning shares look fairly priced today -- not cheap, but not overly expensive either. Corning's balance sheet shows $1.9 billion more cash than debt (a good thing), but its cash flow statement confirms the company is still generating about 10% less free cash flow than it claims to be "earning" under GAAP (a bad thing).

On balance, I'd say the risk and reward are pretty equally weighted on this stock -- for now. What worries me, and in the end makes me inclined to ignore Susquehanna's buy recommendation on Corning, is the analyst's suggestion that Corning can count on a "free cash flow margin" of only 15% to 20% going forward.

Right now, the $1.8 billion in free cash flow that Corning generates from its $7.8 billion in revenues works out to a FCF margin of better than 22%. A decline to a 20% -- or even 15% -- FCF margin, though, would significantly erode the company's cash profits and, in my view at least, make Corning a much worse bargain.

Given Susquehanna's iffy, near 50-50 record of being right on its stock picks, that's not a risk I'm willing to take.

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Read/Post Comments (5) | Recommend This Article (1)

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 March 26, 2014, at 5:20 PM, cassius100 wrote:

    What this article proves is that none of the analysts, including Smith, have bothered to read what's already available on their browsers about Corning. They assume that Corning's bottom line is married to Gorilla glass forever. It isn't.

    Smith makes a second mistake too. He assumes that cost alone differentiates Gorilla glass from Sapphire. A more important consideration for any hand-held object is breakability. Sapphire shatters when dropped.

  • Report this Comment On March 26, 2014, at 8:43 PM, Rexchapman3 wrote:

    Keeping it classy by firing a slight at the Obscure Analyst! Proving his point - $glw "love" is alive and well with The Motley Fool. You should interview him and/or at the very least review his research. Companies gave soared higher on less....

  • Report this Comment On March 26, 2014, at 11:02 PM, lagunab1 wrote:

    Whiny children would be a better description of this "real analyst". First, this is not a zero sum game...Corning has many markets, GTAT has more. Second, APL has clearly decided, for right or for wrong that GTAT is the horse they want to ride to success, Samsung has chosen Corning.

    10X the cost? no, sorry, that seems highly unlikely, but very self serving.

    Picking Apple in 2009 and staying with them through THICK and much thinner....the first was obvious, the second was missed entirely. So no points on that one. 51% success rate...just better than coin flip.

    GTAT WILL be much higher in value in 3 years than Corning even dreamed of because they are not just an Apple play or a solar play or a SiC play....they are all those and more. Corning is, JUST glass...commodity glass and Gorilla glass.

  • Report this Comment On March 27, 2014, at 2:26 AM, Fool4West wrote:

    Seems there are too many better glass mousetraps potentially coming out of GLW to accept the "JUST glass" description at this point: Special-use optics; automobiles, buildings--places where glass is REALLY used--open up a whole array of possibilities in the next ten years such that Gorilla Glass and even TV panels might be in the background.

    And all this future for a current P/TBV/Share of 1.4 with some of the most modern manufacturing facilities in tech (compare AAPL at 4.1; GTAT at 8.0). Got in big at $11; still in big at $20; expect to be in big when commercial building glass is revolutionized !!

  • Report this Comment On March 28, 2014, at 11:41 AM, riwaterman wrote:

    The investment by Apple in GTAT is for the production of sapphire using an entirely new process that is much more cost effective and efficient than present methods.

    So when Corning says they can produce gorilla glass much cheaper than sapphire, that is true based on a comparison using present, I.e. OLD, METHODS OF PRIDUCTION.

    i

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