Two months ago, Corning
Yet there was hope for the future. Corning promised to deal with the industry's excess inventory problems by slowing production and said it would cut capital spending as well. And as a side benefit of reducing this expense, Corning would open the floodgates and unleash a tidal wave of free cash flow. But what did investors see upon opening Corning's earnings release last week?
Lower cash flow. Higher capital expenditures. Free cash flow that, at just $757 million, backed up barely a quarter of reported net income.
Dude! Where's the FCF?
So what went wrong? Did Corning break its promise? Were investors foolish (small "f") to trust management? Did we get snookered?
Actually, no. You see, here's the thing: Corning never actually promised to cut capex in Q4 2011. What management said was that it would "lower capital spending [in] 2012 and 2013," resulting in "significant cash flow over the next few years." As in future tense. As in we shouldn't have expected Corning to report anything different from what it did report last week.
But for long-term investors, the Corning story isn't about last week, or even last quarter. It's about the future. So today, let's take a quick look at Corning's latest projections for what this future might look like.
According to management, "the [LCD] display industry is in a period of transition and ... resetting expectations for its future growth and profitability." In the near term, price declines for Corning's signature product are going to be "significant," on the order of "double-digit declines." But that's not the worst of it. After the initial, steep price declines, investors can look forward to "more stable price declines" in future quarters. Not "stable prices," mind you. But stable, consistent, year-in and year-out declines in price.
Result: Even with increases in volume of glass shipped over time, it seems likely that the best we can hope for here is that actual sales numbers will hold steady in this segment.
That's the bad news. Now here's the good news: If Corning's plain-vanilla LCD-display glass business is stagnating, other arms of the empire are looking quite good. Management predicts as much as 10% sales growth in the fiber-optic cable business in Q1, for example. Growth at Corning's newest moneymaker, Gorilla Glass, is going to be "significant" as well.
Last week, Apple
And it's not just Apple fueling Corning's growth. Challenging Apple's iPad dominance are multiple tablets powered by Google's
Fasten your seatbelts, folks. It's still going to be a few quarters before Corning hits its promised "new floor in terms of profitability." But once it reaches this floor, Corning should begin growing again. In particular, management is standing by its promise to generate "strong free cash flow over the next several years" -- as much as $7 billion total, by some estimates. With an enterprise value barely twice that number today, Corning looks like a good buy for the long term.
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