One of the market's old-timers, 150-year-old Corning (GLW +7.38%), announced less-than-stellar earnings on Oct. 24. The subsequent drop in share price -- nearly 10%, even after this morning's slight jump -- is enough to get the most stalwart of shareholders to take notice. But for mid- to long-term value investors, considering Corning at these depressed levels makes a lot of sense. And you won't be alone.
At just over $12 a share post-sell-off, Corning isn't quite trading at its 52-week low, but it's not far off. Despite what most deem a disappointing Q3, Corning offers some intriguing possibilities. With newly developed technologies targeting the exploding mobile communications market, a diversified line of revenue streams, and a recently increased dividend yield, it's not hard to make a case for Corning.
Q2 results
In spite of decent revenue -- Corning's $2.04 billion in Q3 sales was up 7% sequentially, and down a mere 2% vs. 2011 -- a nearly $100 million increase in operating expenses hit Corning's bottom-line results hard. Both R&D and SG&A costs increased, reflecting the expenses associated with the development and introduction of Corning's new "willow glass,"(among other things). Selling, general, and administration expenses, along with continued weakness in Europe, are areas of concern for Corning CEO Wendell Weeks, and he intends to act.
According to Corning's Q3 earnings release, the upcoming Q4 is expected to include a $50 million charge for costs associated with some serious restructuring. In a not-too-subtle allusion to overhead, Weeks said, "In order to deliver on our plan to grow earnings, we are likely to implement selected cost reductions in the areas of project spending, capital expenditures, and fixed costs, which may include modest headcount reductions."
Though expenses rose, and earnings paled in comparison to 2011, the 17% increase in per-share earnings compared to Q2 is certainly a step in the right direction. Corning results reflected a 21% drop in equity earnings from Dow Corning, primarily from the lack of a couple non-recurring, one-time gains. Less the accounting moves and one-time gains, most of Corning's six business units performed decently considering the economic environment, led by a 23% sequential jump in its specialty materials unit. Gorilla Glass, and before long the new "willow glass," will continue to drive strong results in spite of downward pressure on glass prices.
Corning's operating cash flow, though not on par with prior quarters, remains strong. Corning actually increased its dividend to shareholders by 20% on Oct. 3, in addition to maintaining its stock buyback program in Q3, without depleting its $6.3 billion cash. Those are good indicators Corning is generating sufficient operational cash flow, in spite of the times.
Let's face it: Corning doesn't have the investment pizzazz of an Internet start-up, or smartphone manufacturer. That's just a fact. What it does provide, however, is a sound value.
With the drop in share price, $18 billion Corning is easily the least expensive option in its universe. Its competitors include 3M (MMM +2.43%) with a P/E of 14, Dow Chemical (DOW +0.00%) at nearly 23, and PPG (PPG 0.34%), which trades at greater than 19 times earnings. They're all more expensive than Corning's 9.5 P/E.
And other than Dow Chemical's 4.3% dividend yield, Corning's 3% is the highest in the sector. PPG and 3M offer shareholders a decent dividend, yielding 2% and 2.6%, respectively, but neither match the new and improved dividend yield of Corning.
Weeks hasn't pulled any punches: Europe continues to be troublesome for Corning, and the slowing of the Chinese economy isn't helping, either. In spite of all that, analysts are nearly unanimous in their opinions -- Corning is a buy at these levels. Analysts at National Securities, Barclays, and Piper Jaffray have recently announced price targets for Corning ranging from $14 to $17 a share. That's 17% appreciation, on the low end, along with Corning's 3% yield.
It's always difficult finding apples-to-apples comparisons for diversified companies like Corning. But at just over nine times earnings, Corning qualifies as a solid growth and income alternative, no matter who it's stacked up against.
