At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.
But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we'll be tracking the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.
And speaking of the best ...
The past few days have seen a slew of new ratings introduced on TV stocks -- not the channels, but the actual television sets. Let's review the news, then see what we can do to m ake sense of it for you.
Glassmaker's future: clear as mud
Our first two ratings concern one of the biggest names in modern television: Corning
Earlier this week, Thomas Weisel Partners informed us that the global economy is "still deteriorating." (Um, duh.) With retailers like Best Buy
No sooner had Thomas Weisel done so than Merrill Lynch piled on with a downgrade of its own. Warning of "the lack of major demand impetus," and citing "extraordinary levels of excess glass industry capacity" in the LCD TV industry, the banker predicted Corning will earn only $0.75 per share in 2009 (21% less than the rest of Wall Street thinks). Pointing to the stock's "recent 24% rally," Merrill thinks now's a great time to exit the stock, and so downgraded it to "underperform."
Meanwhile, downstream ...
Yesterday, we got our third bit of news on the TV industry, as HSBC Securities weighed in on a couple of Corning's customers: panel-makers LG Display
Unlike Thomas Weisel and Merrill, HSBC did not publicize the reasons for its upgrades. I mention them regardless, because this analyst has a pretty strong track record in its work. According to CAPS, HSBC ranks in the top 10% of the investors we track, and of particular note, is "in the green" on a couple of big players in the flat-panel industry: Sony
What's the frequency, Kenneth?
Now let's put our three analyst observations together, and see what we come up with:
- Merrill Lynch says there's too much manufacturing capacity for LCD glass floating around out there.
- Thomas Weisel says this will hurt Corning's pricing power when it tries to sell the stuff.
- And HSBC thinks that the people who buy Corning's glass -- LG Display and AU Optronics -- are both set to outperform expectations.
Do you see what I see? To me, it appears that there's a growing consensus that profit margins will shift from upstream component makers such as Corning toward the panel assemblers such as LG Display and AU Optronics, as the latter capitalize on oversupply of product from the former. Higher profit margins at the panel makers, in turn, suggest they may have the ability to lower their own prices, benefiting the TV manufacturers who buy their panels (Sony, Sharp, and the like). In turn, this could cause lower prices to cascade to the retailers -- benefiting Best Buy, Sears Holdings
The above appears to describe the consensus forming on Wall Street, and investors would be well-advised to take heed of where the analytical crowd is moving. That said, experience has taught me to be cautious when analysts all start moving in the same direction -- lemming-like.
The key risk to the Street's latest investment thesis, to my mind, is that Corning may make good on its threat to cut capital spending in 2009 and perhaps even institute "permanent manufacturing capacity consolidation." If it does so, we could well see the process described above reverse itself. "Extraordinary levels of excess glass industry capacity" could disappear, and Corning could regain its "pricing power in the LCD glass substrate market." And with it, the lower component prices benefiting LG Display and AU Optronics (and their rivals) could vanish.
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Fool contributor Rich Smith does not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 1,184 out of more than 125,000 members. The Fool has a disclosure policy.