As you've probably heard by now, Corning (NYSE: GLW) shareholders got a bit of bad news yesterday. Updating investors on the company's Q4 view, corporate controller Tony Tripeny warned that the loss of a "major customer in Korea" will prevent the company from hitting glass volume targets in that country. As a result, growth in glass sales by volume will fall far short of the company's predicted 10%, and "consolidated equity earnings" will drop 30% sequentially.
Even more troubling, Corning seems to be fueling the fires of Apple (Nasdaq: AAPL) skeptics, who've warned that iPad sales haven't been as strong as hoped this year. Corning says shipments of the Gorilla Glass it manufactures for use on the devices will be down 25% sequentially due to "lower worldwide demand for cover glass for tablet computers." And while it's possible this is due to weak reception for competing devices from Research In Motion (Nasdaq: RIMM), Hewlett-Packard (NYSE: HPQ), Samsung, et cetera, there's no denying Apple is the real gorilla in the tablet market, and probably the only company where a sales hiccup could cause a 25% change in anything at Corning.
Aside from that, Mrs. Lincoln, how was the play?
And yet, the news wasn't all bad. And if you ask me, not bad enough to nearly justify the 11% haircut that Corning stock just endured, or to explain why the stock is sitting out today's monster rally on the Dow Jones Industrial Average (INDEX: ^DJI). Let's review:
- September retail sales of LCD TVs were up 12% worldwide, and even a bit stronger than that in the U.S. This is bullish news for Corning long term and also for investors in key TV hawkers like Amazon.com (Nasdaq: AMZN) and Best Buy (NYSE: BBY) (who were already gorging on good news from Black Friday sales data).
- October TV sales were less bullish, up only 4% -- but big-screen TVs, which use more of Corning's glass than do smaller models, were "the fastest-growing size category, resulting in area growth rates that are higher than unit growth."
- Best of all, Corning expects "the display glass supply chain to exit the year at historically lean levels compared to past years."
Big news
That last, rather innocuous-sounding statement out of Corning is actually huge news for investors, and promises a big opportunity to profit from the stock. Consider: According to Corning, "worldwide glass demand [will] increase sequentially this quarter." Yet Corning intends to "reduce capacity at both our wholly owned business and SCP," including "delaying the start up of new glass melting tanks" and "postponing the relighting of tanks that are down for repair." These are just a couple of the actions Corning will take to deal with lower-than-anticipated demand for its products as it slashes worldwide capacity "by approximately 25%." These actions also lend credence to management's promise to "lower capital spending [in] 2012 and 2013," resulting in "significant cash flow over the next few years."
For a value investor like me, that's absolutely key to the Corning buy thesis. You see, I've been complaining for years about how Corning's free cash flow never quite catches up to its reported net income. Sure, Corning looks cheap at six times earnings -- but if the company can't generate free cash flow that at least matches up with reported profits, it's hard for me to say the stock is really cheap. But if Corning is now reaching a point where the laws of supply and demand give it permission to cut back on capital spending, yet still provide the TV makers with an all-you-can-eat supply of LCD glass, maybe Corning will finally become as cheap as it seems.
Crunching numbers with Corning
Let's look at a few numbers. Even capex-hobbled as it currently is, Corning managed to generate $2 billion in free cash flow over the past 12 months. At an enterprise value of $16.6 billion, that works out to an 8.3 EV/FCF ratio on the stock -- which is expected to grow at not less than 9% over the next five years, and pays its shareholders a 2% dividend.
To me, Corning's current $13 stock price is already selling at a discount based on free cash flow. It sells at an even bigger discount when you factor in the dividend. (So already, I'm tempted to buy.) But if Corning can accelerate free cash flow production by cutting back on capex, as it says it plans to do? Fools, that would absolutely turbocharge the growth rate, and make this stock a flat-out buy in my book.
Far from selling the stock, as everyone else on Wall Street seems so eager to do lately, I'm champing at the bit to buy it. (As management says it wants to do.) For the time being, I can't -- because according to the Fool's ironclad trading rules, I must wait three days after this article publishes before taking any action at all on the stock.
You can still buy it, though. And I'd urge you to do so. And for what it's worth, I'm going to go ahead and put my reputation on the line on this one. I'm so convinced Corning is a buy that I'm going to publicly recommend the stock in my CAPS portfolio. Follow along and see how it works out -- and yes, please do feel free to jeer and publicly mock if this all goes horribly wrong.
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