After so much carnage, could Corning
COO Peter Volanakis sure thinks so. Speaking at yesterday's Morgan Stanley Technology Conference in San Francisco, Volanakis cheered investors with the news that: "Retail sales of LCD TVs have continued to be strong, panel inventories on average remain healthy, and panel prices are stabilizing. The current trends look positive."
Volanakis refers to two separate points along the LCD supply stream, so let's take them one at a time:
Never underestimate the consumer's willingness to spend
First, retail sales. This is where the rubber meets the road, or more precisely, where retail consumers like you and I buy LCD flat panel television sets from retailers like Wal-Mart
Meanwhile, upstream...
The continued strength in retail sales appears to be slowly draining the inventory glut from the system. Corning tells us that LCD panel makers are winning price increases on the most popular LCD screen sizes. (Panels, by the way, are the precursor parts that TV manufacturers like Sony
Good news or great news?
Now, admittedly, Corning has been guilty of ill-considered happy talk in the past. So before we take its latest bullish prognostications as gospel, let's quality-check them. Independent reports from Taiwanese tech journalist Digitimes tell us that LCD panel maker Chi Mei Optoelectronics is ramping up "utilization", which suggests that the company sees greater demand from end TV producers such as Sony. Although Chi Mei's utilization is down from 45% in Q4 2008, to about 35% to 40% this quarter, Chi Mei believes there are signs the market has finally hit bottom -- and will bounce back in Q2 and beyond.
This, by the way, accords with Corning's own view that H2 2009 will be key to Corning's achieving it targeted LCD glass sales this year.
The risks
Good news all around then, right? Well, not quite. Shares of Corning are rebounding in response to the COO's bullish prognosis, but personally, I still have my reservations -- for two basic reasons:
First, the numbers don't make a whole lot of sense to me. For one thing, I've yet to find confirmation from another independent source of this vast new rise in flat panel TV sales. Last we heard, flat panel sales were supposed to decline this year. And while that prediction, from industry analyst DisplaySearch, is three months old, it does appear to tally with a report just out from iSuppli, which tells us that flat panel plasma televisions, at least, are "losing momentum" this year.
Granted, I suppose that plasma's loss could be LCD's gain -- the two display technologies are, after all, rivals. And yet, I'm still not sure how we went from DisplaySearch's December prediction of 2% growth in unit sales, and a 16% decline in revenues, to what appears to be strong double-digit growth in LCD TVs -- all in a matter of three months.
Second, from an investing perspective, I'm not at all certain that Corning shares are worth buying even if sales are turning back up.
Foolish takeaway
Listen, Fools, I'm as intrigued by Corning's 3 P/E as anyone else. I just don't think it tells us the whole story. While Corning reported more than $5.2 billion in "earnings" last year -- which explains the low P/E -- the company generated less than $210 million in actual free cash flow. The vast disparity between Corning's accounting profit and its real cash earnings helps to explain why this firm continues to eke our bare single-digit returns on capital. Simply put, the "profits" here are illusory.
Long story short, with Corning stock now selling for about 70 times free cash flow, even Wall Street's predicted 13.5% long-term profits growth fails to entice. This week's rebound story may be uncertain, but as the stock's overvaluation is conclusive.
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