Are you in the market for an LCD TV? Surveys say: Yes, you are!
A recent story in the LA Times advises that flat-panel TV shipments in the U.S. were brisk in the first three months of this year -- 17% higher than the same period last year. Also, The Wall Street Journal reports today that statistically speaking, most of these shipments were for LCD TVs, which are outselling plasma by more than 7-to-1.
So far, Wal-Mart (NYSE:WMT) has reaped the biggest share of these gains; researcher iSuppli says its flat-panel market share increased 60% year over year, to 22.3%. However, Best Buy (NYSE:BBY), Target (NYSE:TGT), and Sears Holdings (NASDAQ:SHLD) are all getting their share of the action. Online, Amazon.com (NASDAQ:AMZN) and Overstock (NASDAQ:OSTK) have staked their own claims in this booming market. But judging from yesterday's news, the biggest beneficiary of the boom could well be a single company, far upstream from the madding crowd of retailers. Its name: Corning (NYSE:GLW).
Encouraging Corning
The manufacturer of the ultrathin glass screens that are the most prominent feature in any LCD TV exulted yesterday that its second-quarter shipments (by volume) could easily beat out Q1's numbers by 100% -- an estimate that's been steadily rising over the course of three successive predictions by management, and could rise even further.
In Tuesday's update, Corning CFO Jim Flaws confided that he's seeing: "a significant upward spike in domestic LCD TV sales in late May and the first three weeks of June." The news tallies nicely with similar reports of demand spikes in Japan, China, and Europe.
Refreshing reticence
For the time being, Corning is taking a cautious stance on the good news. Despite the significant uptick in Q2 demand, Flaws maintained sales guidance for the year at 2.1 billion to 2.2 billion square feet of LCD glass to be shipped. Previous predictions of a stronger-than-second-quarter Q3 have been walked back in light of how good Q2 is now looking. Flaws now says that third-quarter shipments should be only in line with Q2's more robust number.
And as far as Q4 goes, Flaws sounded a note of refreshing -- almost human -- humility: "It is far too soon to forecast fourth-quarter performance." Contrasted with the letdowns we've experienced following far-out predictions from the executive ranks at companies like General Electric in years past, Flaws' admission of mere mortal foresight, and only six months' supply of 20/20 vision, is refreshing. (And according to research conducted by hedge fund advisor George Muzea, statistically correct.)
Valuation
It's also enough to give many investors a glimpse of wild profits in coming months. After all, Corning's stock today fetches a mere six times trailing earnings. If sales are growing at 100%, this paints a picture of a PEG ratio so low as to defy belief.
But there's good reason for that. First and foremost, remember that we're talking only sequential growth, which is far less significant than the bigger-picture, year-over-year change in shipment numbers (which, incidentally, Corning did not disclose). What's more, there may be significant difference between Corning's trends in sales by volume and sales by dollars. Even as the volume of shipments is doubling, Flaws cautioned on the pricing of these shipments: "second-quarter prices were moderate and substantially below the first-quarter price declines."
In other words, it appears the price on the glass is still falling -- which means that sales growth in terms of revenue is going to fall somewhat short of 100%.
How much short?
We'll have to wait for Corning to release its Q2 numbers in late July or early August to learn how the quarter turned out. Longer-term, though, analysts are predicting something on the order of 14% annual profits growth at Corning over the next half-decade.
Of course, Corning bulls will reply that relative to the P/E of six mentioned above, that still makes Corning look like an exceptional bargain. So why am I still not buying?
Foolish takeaway
One reason, and one reason only, Fools. The fact remains that no matter how profitable Corning looks on the surface, those "accounting profits" just never seem to show up on the firm's cash flow statement. Despite promises to cut capital expenditures and scale back operations as the recession began to bite, Corning still managed to generate only $367 million in free cash flow over the last 12 months.
While I understand that a high-tech concern like Corning must continually invest in new factories, research and development, and a hundred other things necessary to maintain its edge, the fact remains: Selling today for nearly 67 times free cash flow, I just cannot countenance an investment in Corning today.
When you get right down to it, I don't care how many LCD TVs Corning can help build, unless it proves it can make some real cash money off of these gizmos. And I won't buy the stock until Corning shows me the money.
Read more about the promise and the disappointment that is Corning:
