Corning, Inc. (NYSE: GLW)
Shares of GLW traded lower in the prior few sessions after a strong move higher off of its 200 day moving average in early May. On Friday, GLW was hit with a downgrade to sell out of Drexel Hamilton with some very cautious comments.
GLW Analyst Expectations
The equity research team at Drexel Hamilton had the in depth look at GLD, released on Friday.
Downgrading GLW to Sell; Get Out While the Getting’s Good
Trading at over 16x our CY:16 EPS estimate and up 15% YTD, we are downgrading Corning to Sell from Hold as we believe the “dead cat” bounce in the LCD supply chain is a transient event that will reverse itself in 4Q:16 and into 2017. For value investors, we recommend Apple (9x ex-cash), Cisco (10x ex-cash) and IBM (11.5x). In our view, Corning’s financial engineering with the SCP joint venture acquisition, the Dow Corning divestiture and the amped-up capital return program have blinded investors of the fact that the LCD market remains in a sharp secular decline.
LCD Glass Remains in Secular Decline. Given that Corning generates 60-70% of its segment net income (over the past 3 years) from the LCD glass market, the company is hostage to the demand trends in the PC and TV markets. Unfortunately, we believe the decline in PCs remains unabated and TV growth will only become more difficult in the years ahead. Although LCD glass volume could chip in mid-single-digit growth driven by larger screen sizes, even moderate glass price declines make sales growth nearly impossible as evidenced by the 13% decline (or down 8% when recasting 2014) in Corning’s Display sales in 2015. We also see nothing in the pipeline that can replace the profit impact of Display. Near-Term Relief in LCD World is a “Dead Cat” Bounce. After the worst March quarter in the history of our Taiwan Panel Monitor, our trip to Computex last week highlighted that panel prices continue to drift higher in 2Q:16 and TV demand is benefitting from the build ahead of sporting events this summer. However, we expect these trends will begin to reverse themselves by 4Q:16 and into 2017 given the lack of demand for PCs and TVs. Also, a China-based LCD glass maker is on the rise. Valuation is Difficult to Justify. Delivering 0% annual EPS growth (not “recast”) since 2007 with an 8% EPS decline in 2015 (or down 1% on “recast” EPS), we believe a 16x P/E is absurd. Corning is trading above its historical average P/E of 12x at the same time that the leading panel makers are near trough price-to-tangible book ratios. Moreover, Corning is trading at a healthy P/ E premium to Apple (13x our CY:16 or 9x ex-cash) that has grown EPS by 39% per annum since 2007 and reports GAAP EPS.
About Corning, Inc.
Corning Incorporated (Corning), incorporated on December 24, 1936, is engaged in the manufacture of specialty glass and ceramics. Corning operates in five segments: Display Technologies, which manufactures glass substrates; Optical Communications, which is engaged in providing optical solutions; Environmental Technologies, which manufactures ceramic substrates and filter products; Specialty Materials, which manufactures products that provide over 150 material formulations for glass, glass ceramics and fluoride crystals, and Life Sciences segment, which is a developer, manufacturer and supplier of scientific laboratory products. The Company manufactures and processes products at approximately 90 plants in over 20 countries. Corning offers its products under the trademarks, including Corning, Celcor, ClearCurve, DuraTrap, Eagle XG, Epic, Gorilla, HPFS, Pyrex, Steuben, Falcon, SMF-28e and Willow. – Reuters
