Corning is On Sale! Should You Buy It?

Adam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

My mother has two rules of shopping:
1. Buy it if it’s on sale.
2. If it’s on sale, buy it.

Rule #1 is great. She bought things my siblings and I loved and got a great deal on them. Rule #2 is not so great. Rule #2 was the cause of our house filling up with useless junk that nobody really wanted.

The lesson is sometimes things go on sale and they present great value, but sometimes things go on sale because nobody wants them and stores are just trying to get rid of them. Don’t waste your money on the latter. You’ll end up with a house full of junk, and could find yourself on an episode of Hoarders.

Last week, Corning (NYSE: GLW) released its Q3 earnings report. Despite beating estimates, the company’s guidance for Q4 and beyond was rather pessimistic, sending the stock plummeting about 10%. While not quite at its 52-week low, Corning is definitely on sale these days. But is the stock a value bargain, or is it a piece of junk that will stuff up your portfolio?

At a price under $12 per share, Corning currently trades at a forward P/E of just 8.75. However, its slow earnings growth results in a PEG of 3.4. Comparatively, the industry trades at a forward P/E of 11.5, but its 1.6 PEG ratio is less than half that of Corning’s.

Corning is quickly becoming an industry laggard despite its innovative products. Let’s examine why.

LCD Display Sales are Declining.

Display technologies is Corning’s largest business segment having created 78% of the company’s net income in 2012. Television manufacturers are seeing revenues fall across the board. Sony (NYSE: SNE) posted its Q2 earnings recently, and reported a 31.5% decrease in sales year-over-year and cut future forecasts. Panasonic (NASDAQOTH: PCRFY) also cut forecasts on weaker than expected television sales. Additionally, while Sharp maintained its forecast for television sales, it lowered its expectations on LCD displays.

Manufacturers selling fewer television sets coupled with declining PC sales have resulted in an 11% decline in display sales year-to-date. Lower sales in addition to decreasing margins means profits are down by about one-third in 2012.

Corning’s CFO James Flaws blamed macro-economic pressures as the cause of weak sales during last week’s conference call. However, I don’t think this is a macro-economic issue at all. Corning is facing a structural problem as PC sales decline faster than expected and television manufacturers show weakness in an industry with substantial price competition.

Corning’s Other Business Segments Cannot Make up the Gap.

Many believe Corning can make up the ground lost in LCD displays with its glass products in the mobile computing industry. Corning’s Gorilla Glass is present in the Apple iPhone and the Samsung Galaxy S3 among many other mobile computing products.

Indeed, the specialty materials segment was a bright spot on the latest earnings report. Sales increased 21% with earnings up more than 50% from the same period a year ago. However, the year-over-year addition of profit was just $21 million. Analysts expect the total yearly profit from specialty materials to rise $80 - $90 million. Comparatively, display technologies saw a decline of $159 million from a year ago in the previous quarter alone.

Aside from Gorilla Glass, Corning has struggled in its other business segments. Telecommunications, life sciences, and environmental technology all saw revenues and net income fall from a year ago. Corning is attempting to bolster its life sciences division through the acquisition of Becton Dickinson’s life sciences business segment. Despite the subsequent revenue boost from the acquisition, I do not foresee the smaller divisions making up for the lost revenue from LCD displays.

A forward P/E of 8.75 is not unreasonable considering the structural changes in television and PC displays, and the sharply depressed earnings the company has posted over the last 15 months. At this price, Corning is on sale, but I believe it is on sale for a reason.

The Big Picture

With the explosive growth of smartphones worldwide, many investors thought they would ride Corning's dominant cover glass to massive investment returns. That hasn't played out yet, as mobile growth has failed to offset declines in the company's core business. In this brand new premium research report on Corning, a Fool analyst walks through the business, as well as the key opportunities and risks facing it today. Click here to claim your copy, and receive a full year of updates as key events unfold.

adamlevy has no positions in the stocks mentioned above. The Motley Fool owns shares of Corning and is short Sony (ADR) and has the following options: long JAN 2013 $22.00 calls on Sony (ADR). Motley Fool newsletter services recommend Corning. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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