Corning: Citi Sees Risks Rising

Citigroup’s Jim Suva this morning launched coverage of Corning (GLW) with a Hold rating and $23.50 price target, noting that “demand risks are rising” for the LCD glass maker.

Suva writes that GLW faces “multiple slowing derivatives ahead,” with flattish gross margins as LCD manufacturing leverage peaks, slowing EPS growth and a potentially weaker economy pressuring consumer demand for LCD TVs. “Given the outsized contribution of LCD to profits and EPS, we see little room for EPS acceleration, and thus limited multiple expansion,” he writes.

Suva says the current valuation is “approximately fair,” and reflects anticipated cuts in consensus EPS estimates and the risk of slowing LCD demand from weaker consumer spending. He says it is too late to sell the stock, with the secular story intact and no cash or liquidity concerns. Suva’s advice: “look for lower consensus estimates and improved discretionary spending before adding to positions.”

Also cautious on the stock this morning was ThinkPanmure’s Vijay Rakesh. He noted that panel makers like AU Optronics (AUO) and LG Display (LPL) have been reducing output. “With Corning getting a two-week production forecast from the panel makers, GLW adjusts its glass output and fab utilization accordingly,” he writes. “Lower panel output from the panel manufacturers would, therefore, imply softer glass demand from Corning, because though GLW has pricing set quarterly or annually with the panel makers, glass is not on a ‘Take or Pay’ contract. Hence, glass output comes down if panel inventory or TV inventory at the panel manufacturers or TV OEMs picks up.”

Comments

[LarryH]

I don't think a "hold" is surprising with overall conditions what they are. I own GLW and will hold it. According to figures from S&P, 45% of GLW's sales come from display panels, and that yields 53% of net income. Telecommunications fiber accounts for 30% of sales and 6% of net. Environment products makeup 13% of sales, and life science (5%) and specialty materials (7%) make up the rest of sales. Over 50% of GLW's sales are in Asia. In addition, GLW owns a stake in Dow Corning, and GLW initiated a $500 million buy back last year. The technical analysis for GLW is of course bearish at this time, but what stock isn't? It would be hard to make a case that GLW is a screaming buy now, since overall economic conditions are slowing down. In my mind it is a good "hold," and I will do that in the hopes of better times ahead. If it gets a little cheaper, I will add to my position.

[Lisa]

Talk about bolting the stable after the horse has left! Look at the chart -- that decline is due to the weak results from the LCD panel vendors over the last month.