Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...

When Corning (NYSE:GLW) reported a big earnings beat yesterday -- and investors sold off the shares in response -- I made the case that this was an overreaction, a mistake, and a misreading of the company's news.

Most investors disagreed with that assessment (it seems), and Corning stock fell more than 5.5%. But today, investment banker Merrill Lynch agreed that investors were failing to appreciate the good news at Corning, and upgraded it to buy, with a $40 price target implying there's 25.5% upside in the stock.

Here's what you need to know.

Five dice labeled buy and sell on top of LCD screen showing stock charts and numbers

Image source: Getty Images.

Bad news...

What was it that Corning said yesterday that got investors so upset? That depends on whom you ask.

Some commentators say Corning missed analyst targets for Q1 revenue, which ranged from $2.81 billion to perhaps $2.83 billion. And whether they were looking at GAAP sales or "adjusted revenue," Corning returned sales of either $2.81 billion or $2.85 billion.

If you ask me, though, all those numbers look sufficiently similar that, even if Corning did miss on revenue for the quarter, it did so by a mere whisker. Meanwhile, there's little argument that Corning did anything but thump analyst earnings estimates soundly, reporting pro forma profits of $0.40 per share, and GAAP profits of $0.55 per share, against Wall Street expectations for no more than $0.39.

In other words, whatever happened on the revenue side of things, Corning certainly beat earnings.

Really, the only news I found in the report that arguably qualifies as "bad" was this observation from Corning's post-earnings conference call with analysts:

Our 2019 outlook has been impacted by a major fiber-to-the-home customer, shifting its deployment from homes ... This will impact sales by about $100 million. As a result, we now expect our full-year sales growth to be up about 10% which is revised from the low-teens guidance we provided last quarter.

...and good

Investors appear to have keyed in on this revenue warning -- and in part, that's justifiable. Optical communications (i.e., fiber-optic cable) is Corning's largest segment by revenue, generating sales of $4.2 billion last year, according to data from S&P Global Market Intelligence, versus $3.3 billion in sales at Corning's better-known display technologies (i.e., Gorilla glass) unit. Slower sales in fiber optics might be cause for worry -- if that was the only thing Corning had to report yesterday.

The thing is, though: It wasn't.

In addition to noting a shift in fiber-optic sales that will temporarily slow revenue growth there, Corning also noted that sales in its smaller environmental technologies segment were growing faster than expected. And in the display technologies unit, where falling prices have long been a trend in the business, the company noted that prices are now declining at a slower pace than previously anticipated.

What this means to investors

If you ask me, this is the truly important bit of information in Corning's report yesterday. According to S&P Global data, display technologies sales are nearly twice as profitable for Corning (6.7% operating profit margin) as optical communications sales (3.9%).

Simply put, revenue dollars earned from display glass sales are more profitable than those earned from selling optical cable. Thus, it seems to me that if Corning is set to enjoy even stronger profits in the former, this should trump weaker sales in the latter -- especially when said revenue slump is due only to a timing issue, and can still be expected to reappear at a later date.

Merrill Lynch, too, keyed onto this observation, saying it believes glass pricing could move higher than expected in future quarters. In a note covered on TheFly.com, the analyst added that it's looking for better gross profits, for operating leverage resulting in operating profit margin improvements, and for Corning to spend less on capital investment -- which could lower costs and improve profits even further.

That raises the prospect of Corning potentially growing beyond consensus expectations for 10% long-term earnings growth, despite a temporary shortfall in fiber-optic sales. Between the growth rate and the stock's generous 2.4% dividend yield, there's every reason to believe Corning shares at 11.6 times trailing earnings are a bargain -- and every reason for Merrill Lynch to upgrade it.