Corning Retains Strong Balance Sheet & Market Position Despite Earnings Warning

There are many times, particularly in bear markets like this one, when I look at a company and am quite baffled as to how investors can let a stock drift so low. Then I remind myself that Wall Street is short-term oriented and only cares about today, this week, and maybe this month. What the reality will be a year or two from now is ignored, which creates the very investment opportunities that long term, value-oriented investors like myself focus on.

I have been a long time investor in Corning (GLW), a leading provider of glass for LCD displays as well as fiber optic cable for the telecommunications industry. The company possesses strong market positions in its two core businesses, has a strong balance sheet, and could generate growth from a budding environmental products division in the years to come.

Given that GLW's main business is supplying glass for LCD displays (think flat screen televisions, computer monitors, etc), quarter to quarter financial results can vary greatly based on the supply and demand dynamics of the end markets GLW serves. That said, the company has been generating strong double digit earnings growth and has built up a net cash position of more than $5 billion, or $3 per share.

After producing several strong quarters in a row, GLW warned on its third quarter recently and as a result 2008 earnings estimates have been sliced from $1.93 to $1.82 per share. The stock, meanwhile, has cratered to around $16 per share. The only conclusion I can draw is that the adverse reaction to the earnings miss is an overreaction. Corning is surely not immune to an economic slowdown by any means, but even if the company only earns $1.70 this year, the stock trades at less than 10 times earnings and investors are getting the operating businesses for only $13 per share (given $3.30 per share in net cash on the balance sheet).

Even if growth rates slow as the global economy sputters through this business cycle, it is hard to argue that GLW shares will remain in the teens for an extended period of time, unless global demand for LCD glass really falls off a cliff and takes years to recover. While anything is possible, I still consider GLW a growth company that can grow earnings per share by 10 percent or more over the next three to five years. As a result, I am added the stock to the Blog Model Portfolio on Thursday.

Full Disclosure: Long shares of GLW at the time of writing.

Comments

[ValueHunter:]

I'm all over it. Jumped in last week when I saw the irrational sell off.

2008 Sep 14 12:04 PM

[kmca1989:]

i picked it up when it was cruising around it's 52 week low, ~$21,22, but i'll probably be putting in a few more shares at this fabulous price.

2008 Sep 14 12:40 PM

[ATLBob:]

I'm also long GLW and have been for some time.

Nothing material has changed within GLW: consumers will ultimately continue to purchase larger LCD TV's and notebook computers, fiber will continue to be installed, the environmental benefits of the ceramic technologies will eventually increase demand and profitability in that area, and innovations will come from the Life Sciences division. The recent drop in share price is Wall Street punishment for the earnings warning: typical myopic/short-term reaction that doesn't seem related to the long-term prospects of the Company. I'm using this weakness to add to my position and lower my cost-basis as I continue to believe in GLW for the long-term.

2008 Sep 14 12:40 PM

[andyn:]

Bought in myself at this level...its TOO cheap here...this market is crazy.
And the fact that the US is moving to all digital broadcast next year should spur upgrades in TVs with all the old CRTs being thrown out and new LCDs being bought. I see the stock around $24 by year end holiday sales time.

2008 Sep 14 01:22 PM

[Garry:]

What about plasma TVs? GLW doesn't do plasma, do they? Lots of cheap competition for laptop glass, what's the future for LCD TV?

Don't forget the high def mandate may force consumers to buy new TVs. LCD or plasma?

2008 Sep 15 07:04 PM

[longdrive:]

Retail sales will be soft this holiday season because this economic uncertainty will affect consumer behavior. TV sales will feel this despite the HD mandate. Nonetheless, GLW is again being grossly undervalued. It got whacked worse than this 6 years ago because of the fiber optic glut - price was below $2. That's when I first loaded up. Time to get some more.

I keep wondering how long before the diesel filters kick in.

2008 Sep 16 02:22 PM

[Socialism c...:]

Garry - plasma is losing out. LCD has wider viewing angles and is cheaper. Plasma does not pose a competitive risk at this point. The decline is more about macro-economics. I'm long GLW because I agree with everyone above that Corning is fundamentally sound, and the time to get in is on the bottom.

2008 Sep 16 05:41 PM

[Chris B:]

... unless consumer spending declines for the next few years. Look at credit card balances, overall debt, fuel prices, the negative savings rate, tighter credit for in-store lending at electronics outlets, higher unemployment, and other long term negatives for consumer discretionaries.

I know that everyone who has ever tried to declare the shop-till-you-drop consumer finished has been humiliated in recent years, but unbalanced trends can remain that way for a long time, as we've learned with various bubbles in the last decade. If the debt-fueled American lifestyle of 60" LCD TV's and Hummers with 6 LCD screens becomes unaffordable, GLW might be the main victim of that trend.

Maybe that will or maybe that won't happen - but it's a risk supported by fundamentals. Then again, maybe China/Europe will rescue the market.

2008 Sep 18 12:55 PM

[longandshort:]

same applies to MU(micron). Those LCD TVs and other electornics will need memory

2008 Oct 02 06:39 PM