Please ensure Javascript is enabled for purposes of website accessibility

Corning Stock Upgraded Ahead of Earnings: 3 Things You Need to Know

By Rich Smith – Jul 7, 2016 at 12:44PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Goldman Sachs doubles down on its Corning pick.

In just 20 days, Corning (GLW 0.59%) stock is slated to report its fiscal Q2 2016 earnings. One analyst isn't waiting around for the good news, however.

The news

Four months ago, investment megabanker Goldman Sachs upgraded Corning stock to buy on expectations that Corning -- which traditionally has made high-tech glass for use in the screens on flat panel TVs, computers, and smartphones -- will expand its business to begin installing glass in cars as well.

It wasn't a great bet. Corning turned in a pretty lousy quarter, chock-full of declines in revenue and profits, resulting in a big drop in the stock price. Nevertheless, this morning, Goldman doubled down on its bet, announcing that not only does it rate the stock a buy, but is so sure of its pick that it's adding Corning to its "conviction list."

Here are three things you need to know about the new rating.


Everyone knows Corning Gorilla Glass, but Corning makes all sorts of other glasses for all sorts of needs. Image source: Corning.

Thing No. 1: OK, so margins didn't bottom in Q1 -- but Q2 for sure!

Four months ago, Corning predicted that after a long slide, Corning's profit margin was "expected to bottom in 1Q16." Instead, it continued to fall, with gross profit margin dropping to 37.3% (versus 41% a year earlier) and net profits turning negative.

Undeterred, Goldman Sachs is parroting the same line this morning, telling investors that even if it was badly mistaken four months ago, this time, Corning will certainly "lead to the first sequential expansion for gross margins in a year" -- and greater profits for Corning, and profits for investors besides.

Goldman is now predicting that Corning stock will rise to $27 within a year, yielding profits of as much as 34% for investors who buy today.

Thing No. 2: Why?

What has Goldman Sachs feeling so optimistic? StreetInsider.com ran down the upgrade this morning, and this is what they said: "a glass volume recovery" is in the works at Corning. "Utilization cuts and inventory reductions," which prevent Corning factories from working at full capacity and hurt profit margin, "ended in 1Q16."

Meanwhile, "glass volumes have under-shipped demand for the past three quarters" industrywide, and that's created pent-up demand which will support glass pricing -- resulting in both increases in glass volume shipped and better prices -- and higher profits for Corning.

In short, Goldman may have been wrong four months ago, but it has "conviction" that when Corning reports earnings on July 27, Corning will provide it right.

Thing No. 3: And that's not all

One additional factor could magnify gains for Corning investors -- if Goldman is right about all the above. Last year, Corning reached an agreement to sell its stake in Dow Corning for $4.8 billion. According to the analyst, Corning will be pouring much of that cash into buybacks of its own stock.

In total, Goldman says it's expecting to see "more than $4bn of buybacks over the next year," and believes that by concentrating profits among fewer shares, Corning will add about $0.07 per share to its earnings in 2017. Analysts who are predicting only $1.56 per share in earnings next year, therefore, may be in for a (positive) surprise.

The most important thing: Valuation

Currently, these same analysts say Corning will probably earn $1.36 per share this year. So assume for a moment that Goldman Sachs is right about all the above. Corning earns $1.36 this year, and then flips the digits around and earns $1.63 next year.

That's 20% year-over-year growth -- far better than the 13% long-term growth rate that most analysts are positing for Corning. But is it fast enough to justify the stock's price?

Judging from data provided by S&P Global Market Intelligence, Corning stock sells for 39 times trailing earnings and about 15 times the consensus prediction for this year's profits. At long last, Corning stock is producing strong free cash flow, and sells for a multiple of 23 multiple when valued on FCF. The stock also pays a respectable 2.7% dividend yield.

In short, there's an argument to be made in favor of buying Corning stock if Goldman is right about the glass market hitting an inflection point this quarter, if profit margin rebounds, and if the buybacks arrive in the volume anticipated. Should everything work out exactly as planned, then I'd be willing to wager that Corning stock, at 23 times FCF and with a 2.7% dividend kicker, is a buy on 20% growth.

On the other hand, if any single one of Goldman's predictions fails to pan out -- as they failed to pan out last quarter -- then I fear Corning stock will turn out to be not fairly valued, but overpriced.

Caveat investor.

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. 306 out of more than 75,000 rated members.

The Motley Fool recommends Corning. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Corning Stock Quote
Corning
GLW
$34.12 (0.59%) $0.20

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
356%
 
S&P 500 Returns
118%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.