The Earnings are Coming!
Steve is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
We are in the midst of earnings season and I am looking forward to what Corning Inc. (NYSE: GLW) has to report in its financials and what it says on its analysts' call on Wednesday morning, April 25th. The company's stock has suffered a decline of more than 8% over the past 90 days which badly lags the S&P 500's gain of just less than 5% during that stretch. Corning's share under-performance over the past 90 days and the past several years stem from pressures from oversupply in the glass panel market (where it controls more than half of the market), soft end-market television demand, and nagging low customer inventory levels.
Consensus earnings estimates for the quarter ended March 31 have fallen even more sharply than the share price over the past 90 days, dropping by 20% to $0.28 from $0.35. Analysts have also been cutting their estimates for the fiscal 2012 and 2013 years. For 2012, the consensus forecast has declined by more than 20% to $1.34 currently, compared to $1.68 earlier. With cuts to earnings forecasts out-pacing share price declines, the forward PE has expanded to 9.8x for 2012 compared to just 8.6x 90 days ago. A similar pattern is seen in its 2013 earnings estimates which fell by almost 14% over the past 90 days to a current estimate of $1.49 from $1.73 previously. Again, the forward PE multiple has expanded from 8.3x to 8.8x currently. These expanding forward multiples are suggesting that share price may have further to fall if earnings do not begin to surprise to the upside in the coming quarters. The first quarter's earnings announcement will have much to say about the direction earnings estimates will take for the rest of 2012 and into 2013. If the company posts a positive earnings surprise like it did in Q1, Q2, and Q3 2011, I expect analysts estimates have bottomed and will begin to reverse course upward.
The key, in my opinion, will be revenue growth. Revenue is expected to decline for the next two quarters and for 2012 analysts see a small 1.4% increase. 2013 estimates are much more optimistic with revenue growth forecast to return to the average 8.7% rate seen since 2006. Should revenue growth stabilize and expand sooner than currently estimated, Corning's share price would get a tremendous boost. I believe that because LCD television customer inventory levels are currently so weak, it will take a less than typical cyclical pick up in demand to positively impact Corning's revenue growth through higher pricing and volume. Another potential source of renewed revenue growth comes from greater acceptance of Gorilla Glass for use in televisions, smartphones, and tablets. And when Corning's revenue growth turns the corner, the recent record amount of capacity expansions and upgrades will allow the company to effectively make the turn from slowing growth and leaner inventory to faster growth and expanding inventories.
Aside from revenue, I am most interested in hearing what management has to say about gross margins, operating expenses, and operating cash flow. Gross margins will give us a view into demand and pricing while operating expenses are important because the company saw a significant rise in operating expenses in 2011. This was caused primarily by restructuring and litigation line items that went from being credits ($378 million or 5.7% of revenue) in 2010 to expenses ($153 million or 1.9% of revenue) in 2011. I really want to see how effective management's cost control has been without the noise of these non-recurring credits and charges. Operating cash flow declined by about 45% in the fourth quarter of 2011 and by 17% for the year so I want to see positive, or at least stable, cash flow growth beginning in Q1. This would provide evidence that Corning's competitive advantages are still in place in the glass panel market and are improving in its Life Sciences and Telecommunications segments where it competes with Becton Dickinson (NYSE: BDX) and 3M, respectively. Although they compete in Life Sciences, Corning and Becton Dickinson recently announced they have reached a deal where Corning will purchase a majority of Becton Dickinson's Discovery Labware unit for about $730 million to add lab research tools to Corning's product portfolio.
The bottom line is that I think current earnings estimates for Corning in 2012 and 2013 are probably too pessimistic and the earnings released next week will begin to shed light on 2012. With the share price having underperformed so much recently, I'd be a buyer on any positive earnings surprise because with its recent production capacity improvements, Corning is poised to deliver into growing demand and consolidate their industry leading position.
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