"I'm well aware of the risk that I'm getting sucked into a value trap here, and that Corning may very well just continue stumbling along with inconsistent and unspectacular cash flow."
I believed he summed up what many investors think about the company's recent (18 month) journey with struggling markets and over supplied product. The company will continue to struggle through its present trade zone but has a good opportunity to break through toward the end of the year.
I have read that Corning's 1Q report was a pleasant surprise, but I do not see that. The company recorded sales of $1.52 billion and net income $70.5 million, 61 percent lower than last year's first quarter. Both sales and net income were lower than the first quarter of 2011. It was a difficult quarter for Corning due to oversupply in both the silicone and polycrystalline silicon industries. Not only that, but rising costs of raw materials and energy did not help. There is a rise in demand of the silicone-based materials but pricing pressure is having a negative effect upon the bottom line.
While demand in products might be picking up, prices are still slumping because of over supply. Hemlock Semiconductor Group joint ventures will continue to be challenged by the oversupplied polycrystalline silicon industry. If you are unaware, polysilicon, is a material consisting of small silicon crystals with a grainy texture used as the conducting gate material in MOSFET and CMOS processing technologies. Interest in the product is on the rise, but because of an over supply, prices are still depressed -- and will remain so, until supply and demand balance out.
Corning has stated that LCD prices are easing. But it does not expect sales volumes to rise later this year. For this reason I expect the stock to continue to trade in the zone it is now in for some time to come this year. The stock has been trading between 12.50- 14.50 for months. On the bright side, its lows have been getting slightly higher, but I expect it to trade in this range. Since it is at the top, a nice short income play would call for a Bear Put Spread.
The Options Play
- Buy an August 2012 put with a '14' strike (priced at $0.75)
- Sell an August 2012 put with a '13' strike (priced at $0.39)
- Net Debit to Start: $0.36
- Maximum Profit: $0.64
Reasoning behind the Trade
- Even though some industries are picking up, some are still depressed and pricing won't get better until the last quarter of the year.
- There is significant stock moving news to think it will suddenly take off in a bullish direction.