How Can You NOT Buy Corning on This Dip?

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Specialty glass maker Corning (NYSE:GLW) tumbled as much as 10% Wednesday as price declines for LCD displays ate into its outlook.

Even worse is that the company’s fourth-quarter profits dropped 53% year-over-year. A drop was expected, but that is quite an ugly number.

However, if you’re a long-term investor, look past the headline decline and consider a buy-and-hold investment in Corning. The glass maker is a dominant player not just in the television business, but also as a supplier for smartphones via its “Gorilla Glass.” This is a company that, while experiencing short-term hiccups, is not going away — and has the prospect for a significant rebound.

First, let’s dissect the earnings. They aren’t as bad as you might think.

Corning’s net income declined to $491 million, or 31 cents a share, from $1.04 billion, or 66 cents, in the fourth quarter of 2010. But when you back out one-time charges and special items, earnings squeak up to 33 cents per share — right on target for the consensus set by Bloomberg.

Also, fourth-quarter sales actually increased about 7% to $1.89 billion, from $1.77 billion a year earlier. The average estimate was $1.85 billion — meaning Corning not only increased its sales, but also beat expectations.

Now we get to the bad news: Corning said first-quarter earnings could fall anywhere from 5% to 20% based on low prices and weaker demand. Ouch.

You can understand, in a way, why Wall Street ran screaming. Nobody wants to be on the hook for the worst-case scenario offered by Corning. And let’s be honest, if a 20% drop is forecast, the actual drop could be even deeper.

But follow this math. Let’s drop 20% out of the first-quarter forecast of 41 cents, getting us to 33 cents. Add in the next three quarters for fiscal 2012 — estimates of 44, 47 and 48 cents a share, respectively. That’s $1.72. Based on a current share price around $13.20, that gives you a forward price-to-earnings ratio of just 7.7. Pretty cheap — and that’s baking in the worst forecast of a 20% decline, and simply meeting expectations instead of beating them for the rest of the year.

In short, there’s reason to think that this is just a temporary hiccup and not the end of the world.

What’s more, in 2012, Corning is rolling out Gorilla Glass 2.0 to improve on its previous landmark product, made popular by Apple‘s (NASDAQ:AAPL) original iPhone. The new glass was just unveiled at the Consumer Electronics Show in Las Vegas. Specs indicate the new iteration of the product is 20% thinner, but just as scratch-resistant. Thinner glass allows for greater touch-sensitivity on gadgets, and a lighter weight for smartphones as a result.

Will Gorilla Glass 2.0 single-handedly turn around Corning? No. But it’s certainly a shot in the arm. With a severe drop in first-quarter sales now baked into GLW stock due to today’s selloff, the new glass could start boosting numbers just in time to stabilize the stock and help it stage a comeback.

Wishful thinking? Maybe. But look at the long-term fundamentals, and you see Corning is a well-run operation with a history of good numbers. The sales growth in Q4 marks the ninth consecutive quarter of year-over-year improvement in revenue. And while fiscal 2011 profits are down a bit from 2010 numbers, they are up significantly from 2009 numbers that took a hit during the recession. You might be able to argue that consumer spending is stagnant, but it’s certainly not getting any worse. And many people can make a good case for increased demand in the next few years — either due to a broad-based recovery taking shape, or simply by virtue of organic growth for 21st century “necessities” like smartphones and flat-screen TVs that will use Corning’s specialty glass.

Throw in a 2% yield, a dividend that was boosted by 50% at the end of 2011 and the prospects of its pollution-controlling gear aimed at diesel engines, and you have a pretty decent long-term play.

This is not to say Corning won’t have an ugly Q1 report. It might. This also is not to say that Gorilla Glass 2.0 will be a hit or that the company won’t stumble around for a few more months as the “imminent” recovery continues to remain just out of reach.

But if you’re building a diverse portfolio of long-term stocks, GLW is worth a look. The P/E is very attractive after today’s selloff (even when you discount Q1 earnings), the dividend is respectable and there is the prospect of future growth.

Not a sure bet, but certainly a calculated risk for long-term investors.

Jeff Reeves is the editor of InvestorPlace.com. Write him at editor@investorplace??.com, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. Jeff Reeves holds a position in Alcoa, but no other publicly traded stocks.


Article printed from InvestorPlace Media, https://investorplace.com/2012/01/corning-earnings-glw-stocks-to-buy-gorilla-glass/.

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