Seeking Alpha
Profile| Send Message|
( followers)  

Corning Inc. (NYSE:GLW) is a solid company that makes a number of interesting products. The shares seem to offer value; however, I think it makes sense to continue to wait before buying a meaningful position. (I like the company and I own a token position in the company now.) There are a number of macro issues that could take the shares lower, plus there are a number of industry and company-specific issues that could also put pressure on the stock in the coming months.

Corning makes specialty glass products that are used in flat screen televisions, and also a product called "Gorilla Glass", which is a durable, scratch-resistant glass that is used in many popular touch screen products like tablets and mobile phones. The demand for television glass has been impacted by competitive pricing in the industry, and that could continue, especially as global economic weakness persists.

The rapid sales of certain mobile phones has not seemed to benefit Corning as much as many investors had expected. This might be due to the fact that as certain companies rotate into dominance, as Apple (NASDAQ:AAPL) has done in the past few years, other companies see sales decline, as Nokia (NYSE:NOK) and Research in Motion (RIMM) have experienced.

In the long run, and as the world economy rebounds, Corning should see higher demand for television glass and possibly higher profit margins on all items. It is a stock I want to invest in, but the following headwinds make me believe that the stock will either remain stagnant, or provide me with a better entry point. Here are some points to consider:

1. Corning is not seeing strong growth and by just taking a look at what investors can do to tech stocks with limited or negative growth, leads me to believe that there is no reason to be rushing into this stock. Take a look at Hewlett-Packard (NYSE:HPQ), or Dell Inc. (NASDAQ:DELL) shares - which now trade for about 4 to 5 times earnings. Corning trades for about 9 times earnings, and if it reports weak earnings or gives investors disappointing guidance in the coming quarters, the stock is probably heading lower.

2. The U.S. "fiscal cliff": I do not believe investors are taking this threat seriously enough. Around the end of 2012, the U.S. Government is poised to raise taxes and institute automatic budget cuts. To see what this combination has done to other economies, just take a look at Greece and Spain - which now have unemployment rates of over 20%. While the U.S. economy is a good deal stronger than Greece or Spain, it is simply common sense to see that higher taxes and reduced government spending could greatly impact our economy as well. Some analysts believe the "fiscal cliff" could shrink the economy by up to 5%. If that happens, we could be in for a major bear market.

3. Europe and China are slowing, and the risks of a financial crisis still seem significant. A slowdown in Asia is likely to create challenges for both televisions and mobile phones. However, if a worst-case scenario plays out in Europe, it could lead to another financial crisis. With many countries burdened with very heavy debt levels, the ability for governments to stem another crisis appears limited.

4. A number of tech stocks have come under pressure in the past couple of weeks. Just look at the shares of chip makers like Intel (NASDAQ:INTC), or Advanced Micro Devices (NASDAQ:AMD), or Hewlett-Packard. With a number of major tech stocks heading lower, it could be a sign that investors are not willing to pay as much in terms of valuation. This is also known as multiple compression. If investors feel Corning is only worth (for example) something like 7 times earnings, the stock will head lower.

I believe Corning could announce weak results in the third quarter. With the shares trading close to 52-week lows now, many investors are sitting on losses and this could mean this stock will see tax-loss selling pressure in November and December. I expect the combination of a possibly weak quarter and tax loss selling from investors to create an initial major buying opportunity at year-end at around $9 to $10 per share. If our economy goes off the "fiscal cliff" an even better buying opportunity could occur, and investors should keep some cash around, just in case.

Key Data Points For Corning:

  • Current Share Price: $11.62
  • 52-Week Range: $10.62 to $15.75
  • Dividend: 30 cents which yields 2.6%
  • 2012 Earnings Estimate: $1.28 per share
  • 2013 Earnings Estimate: $1.42 per share
  • P/E Ratio: about 9 times earnings

Data is sourced from Yahoo Finance.

Disclosure: I am long GLW. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: No guarantees or representations are made. Please consult a financial advisor before making investments.

Source: Why I Expect To Buy Corning Shares For $10 Or Less By Year-End