Shares of fiber optics and "Gorilla glass" manufacturer Corning Incorporated (GLW 0.49%) surged after the company released Q1 earnings this week, rising as much as 5% over their pre-earnings share price -- and for good reason.
Corning crushed analyst predictions of $0.50 per share in "core" earnings, reporting a $0.54 profit instead. Sales similarly trumped expectations at $3.7 billion, where Wall Street had expected only $3.55 billion.
But not all the news was so good.
Corning's sales jumped 15% year-over-year in Q1, with core earnings (a non-GAAP metric) rising even faster -- up 20%. Actual earnings calculated according to generally accepted accounting principles (GAAP) were both better and worse, though -- better because it turns out Corning actually earned $0.68 per share according to GAAP, and worse because this was only a 1% improvement over last year's Q1.
GAAP sales, as opposed to core sales, were just plain worse -- but still not bad -- up 12% year-over-year.
The worst news, of course, concerned free cash flow. But we'll get to that in a minute. In the meantime, here's how Corning did on a more granular level.
Corning by the numbers
Corning's optical communications division (fiber optics) performed better than almost all its other divisions, which was great news. It's Corning's biggest division by sales, and those sales grew 28% year-over-year, with profits up 50%. Display technologies (gorilla glass and other screens) is second-biggest and did second-best, with both sales and earnings up 11%.
Hemlock, Corning's polysilicon business and its second-smallest business by revenue, showed the most improvement, with sales up 38%. Hemlock didn't earn any profit, but at least it cut its losses by 67%, subtracting only $8 million from Corning's bottom line in Q1.
Counterbalancing all this good news, Corning's specialty materials, environmental technologies, and life sciences (the combined revenues of which roughly equal those of the optical division) businesses saw a mix of weak sales growth (from environmental being down 7% to specialty materials being up 9%) and even weaker earnings. Environmental profits didn't grow at all, and earnings actually shrank at both specialty materials and life sciences.
Honey, who shrunk the cash?
Still, the fact remains that Corning's biggest business threw up some impressive numbers in Q1, and that counterbalanced a lot of less enthusiastic performance at the smaller divisions. What really worries me about Corning, though, is this:
Despite reporting net income of $581 million for the quarter, and "core" net income of $465 million, Corning only managed to generate a weak $171 million in positive free cash flow for the quarter. Management argued this was good enough to put the company "on pace for another year of strong cash generation."
But does it really?
Consider: First and foremost, traditionally defined free cash flow -- operating cash flow minus capital expenses -- gives a tally of $151 million in FCF (i.e. not $171 million that management claims) produced by Corning in Q1. According to data from S&P Global Market Intelligence, Corning's FCF is also down 65% from the $434 million in FCF it generated in Q1 2021. From this perspective, I have to say that Q1 does not look like a particularly "strong" start for Corning this year.
It's also worth noting that Corning generated better full-year free cash flow than reported net income only twice in the past five years, and that over the entire five-year period Corning's cumulative free cash flow ($3.4 billion) lagged reported Corning's claimed "profits" ($4 billion) by about 15%. Simply put, Corning doesn't really have a great record on free cash flow. When management promises "strong cash generation," therefore, I'd take that prediction with a few grains of salt.
The upshot for investors
In practical terms, what this means is that even if you think Corning stock is a good value at its current valuation of 16 times net income, with a 15% projected earnings growth rate and a tidy 3% dividend yield, when valued on free cash flow the stock's an iffier value proposition.
Factoring net debt into the picture, I get an enterprise value-to-free cash flow ratio of roughly 23.2-times for Corning currently. So even with the dividend yield and the strong growth rate, the stock looks roughly 29% overpriced to me. That's not nearly as overvalued as a lot of other stocks in this market, but it still doesn't make Corning stock a bargain in my book.