Corning is down nearly 10% on its earnings results, its largest move on earnings since October 2012. GLW missed the consensus EPS estimate by a penny ($0.37 vs. $0.38 expected), but the real disappointment was the lowered guidance for Gorilla Glass sales.
While the company beat on revenues ($2.58 billion vs. $2.53 billion expected), investors are much more focused on performance by segment in GLW given the widely varying margins in those businesses. The revenue beat was due to higher shipments of LCD panels for TVs (which account for about 1/3 of total revenue), mainly as a result of higher consumer purchases globally due to the World Cup. However, the lower sales in the Gorilla Glass segment was a large impact to EPS since Gorilla Glass is the highest margin product that Corning sells.
Management indicated that they had overestimated tablet sales, and the decline in the tablet market (confirmed by the weakness in AAPL’s iPad numbers in Q2) was the main reason for the lower-than-expected Gorilla Glass shipments. They said on the call that tablets make up 40% of total Gorilla Glass sales, seeking to reassure investors that the growth in the phone market (from iPhone 6 shipments in the fall and winter) was still expected.
Here were our thoughts on GLW’s various segments in an Investment Idea last November:
However, how important is Gorilla Glass to Corning as a whole? GLW is a very diversified manufacturing company, with interests in fields as diverse as telecom, environment, and life sciences. Yet, the bulk of the company’s revenues and earnings come from its LCD display business, which supplies screens to the TV, desktop, and notebook market. From the company’s most recent 10-Q:
The Gorilla Glass business is part of Specialty Materials. About 70% of net income in 2013 has been from Display Technologies, and only about 12% from Specialty Materials. In that sense, though the threat to Gorilla Glass is real, the real driver of Corning’s business is Display (again, LCD glass, meaning not for mobile phones). The other businesses are legacy businesses with much lower margins and a minimal impact on the overall bottom line.
With that in mind, the cleanup in the overcapacity in the LCD market over the past year sets the stage for a better environment for Corning in the next 2 years. GLW’s close relationship with Samsung in Display also likely helps it in future business for Samsung Mobile. While AAPL might be shifting more towards sapphire materials in the future, the threat to GLW’s bottom line in the interim is not significant.
Part of the reason why the market has reacted so poorly to the weaker result this quarter is that expectations are quite high for the next 4 quarters (and the new AAPL product cycle). Analysts have modeled about 25% EPS growth year-over-year over the next 4 quarters, quite a jump from the flat figures of the past year.
Nonetheless, GLW remains quite cheap on a valuation basis, which was the original rationale for our long stock position last year. At a trailing 12 month P/E multiple of 15 and a EV/EBITDA multiple of 7, investors don’t expect that 25% growth over the next year to materialize (or the valuation would presumably be higher).
Finally, on a technical basis, today’s selling takes the stock down to within 4% of its 200 day moving average for the first time since late January:
The stock has not really traded below its 200 day ma since February 2013. Currently that level is just below here around 19.30. The stock is interesting there to take a shot on oversold conditions but the longer term bullish case is a little more cloudy after the earnings release. We’ll look to revisit the name if it touches that 200 day moving average but any structure would likely be in the form of playing for an oversold bounce.