After a rough 2015, shares of LCD glassmaker Corning (NYSE:GLW) are on the march again. Helped by a big upgrade from Goldman Sachs, Corning stock has risen 22% from its nadir, and is up 11% over just the past month.
That's the good news. Now here's the bad: According to one investment banker, Corning's recovery this year is nothing more than a dead-cat bounce. According to the analysts at Drexel Hamilton, Corning stock is due for another downturn -- perhaps as soon as the end of this year.
Is Drexel right? Is it wrong?
Here are three things you need to know.
Thing No. 1: How bad is the downgrade? This bad
Corning stock has soared past $20 this year, but according to a write-up on StreetInsider.com this morning, Drexel Hamilton is predicting a steep sell-off in the not-too-distant future. According to the analyst, Corning's glass sales have been buoyed of late by consumers buying big-screen TVs ahead of the EURO 2016 soccer tournament, and the Summer 2016 Olympics in Rio. But the LCD glass business as a whole is in "secular decline," and the recent demand surge for big-screen TVs will not last.
As the worm turns, Drexel predicts that Corning stock will fall as low as $14.50 per share. Accordingly, the analyst believes you should sell the stock.
Thing No. 2: Where the growth isn't
What is it that has Drexel feeling so sure that LCD glass is in "secular decline," and that this is bad news for Corning? As the analyst explains, Corning "is hostage to the demand trends in the PC and TV markets." And "unfortunately, ... the decline in PCs remains unabated and TV growth will only become more difficult in the years ahead."
Here's how the math works: "LCD glass volume could chip in mid-single-digit growth driven by larger screen sizes" and brief spurts of TV-buying ahead of major sporting events. At the same time, though, glass prices have been falling over time, and will continue to do so. Thus, says Drexel, "even moderate glass price declines make sales growth nearly impossible" in dollar terms, despite slight gains in glass sales by unit.
Thing No. 3: The inflection point
Drexel calls Q1 "the worst March quarter in the history" of glass prices, and while it acknowledges "that panel prices continue to drift higher in 2Q:16 and TV demand is benefiting from the build ahead of sporting events this summer," this is a trend that must come to an end after the summer sporting events are finished. "By 4Q:16 and into 2017 ... the lack of demand for PCs and TVs" will return, and falling glass prices, accompanied by falling unit sales, will deliver a double whammy to Corning stock.
Thus, the time to sell is now.
The most important thing: Valuation
I agree. Priced at 23.5 times free cash flow today, and more than 39 times net earnings, Corning stock is remarkably expensive based on the consensus sub-5% long-term growth estimates that analysts are bandying about on S&P Global Market Intelligence. It's even more expensive if Drexel's predictions of declining sales (and profits) materialize.
While Corning's strong 2.6% dividend yield affords some protection to the downside, the overvaluation of the stock is too obvious to ignore. Corning stock must fall, and Drexel Hamilton is right to recommend selling it.
Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. You can find him on Motley Fool CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 309 out of more than 75,000 rated members.
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