Is Corning’s Stock a Sell After Reporting Earnings?

With shares of Corning (NYSE:GLW) trading at $11.88, is GLW a Buy, a Wait and See, or a Stay Away? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Corning released third quarter 2012 earnings on October 24. Net income for the third quarter fell to $521 million, or $0.35 per share, beating analyst estimates by $0.02. Income is down compared to third quarter 2011 at $811 million, or $0.51 per share. Revenue fell 2 percent to about $2.04 billion.

The killer out of the report came with the earnings call (transcript), where management painted a dreary future for the specialty glass maker. James Flaws, vice chairman and chief financial officer, had this to say:

“We’re now at the point where the macro economy is weakening, affecting sales across most our businesses, with several not achieving the growth we had laid out at the beginning of the year. We believe this weakness will continue into the next year.”

Adding about the outlook for glass: ”Our top-down look based on retail demand trends and the level of inventory leads us to view that the Q4 glass market could decline sequentially between the low single digits and the mid single digits.”

And telecom: “We believe our telecom sales will be up in the low single digits for the year, obviously less than our expectations established in February but solid nonetheless given the European economy and slowdowns in some projects.”

And finally: “We expect gross margin to decrease by almost a percentage point driven mainly by pricing in display.”

On November 1, Corning announced that it completed the acquisition of the majority of the Discovery Labware business from Becton, Dickinson and Company (NYSE:BDX) for $720 million in cash. According to the press release, the deal “will expand Corning Life Sciences’ market presence in the multi-billion dollar global laboratory consumables market, especially in important Asian markets such as India, Korea, and Japan.”

E = Debt to Equity Ratio is Close to Zero

Corning’s debt-to-equity ratio of 0.16 doesn’t look that bad. The company’s total debt is $3.4 billion, with $6.35 billion total cash, giving it some wiggle room with minor restructuring costs alluded to in the earnings call.

T = Technicals on the Stock Chart are Showing Weakness

As of October 31, 2012, the stock price is 10.45 percent below its 20-day simple moving average, or SMA; 7.34 percent below its 40-day SMA; and 8.90 percent below its 200-day SMA.

Since the beginning of 2012, the stock price has been in a generally downward trend, falling 10.2 percent this year to date, and 15.69 percent year over year.

E = Earnings are Not Increasing

Revenue has increased at a healthy rate since 2009, but quarterly revenues have remained relatively flat over the last five periods. At its current rate, the company is facing a drastic decline in annual EPS.

(Fiscal year is January-December.)

T = Trends Support the Industry in which the Company Operates

Display technology has accounted for about 78 percent of the company’s income so far in 2012, and as some observers point out, this is a bad thing. Display sales are down 11 percent this year so far. A shift toward mobile and smaller display sizes is not the best thing in the world for a company like Corning. These are not just problems associated with a down economy, they are problems associated with a changing economy. The established decline in PC sales hurts Corning as well as companies like Dell (NASDAQ:DELL) and Hewlett-Packard (NYSE:HPQ).

Display is the backbone of the company, and saw its earnings drop by $159 million in the third quarter. For the year-to-date period, display income is down $625 million from a year ago. Meanwhile, total net income for the other segments of its business is just $338 million.

As pointed out in the earnings call, the company’s Gorilla Glass has driven a 1 percent improvement in gross margin.

The acquisition of Discovery Labware could help drive revenue in the company’s life sciences division as demand for TV glass falls.

Conclusion

Corning is a smart company that knows what its doing. The call may have scared investors who are already be on edge due to the battery of missed earnings calls, stock dives, and lower markets in the past week. That being said, Corning will absolutely have to fight for every dollar of revenue it brings in. The macro-economy doesn’t help, but the tides of display demand mean that the near future may not hold many dollars for the company. Eyes will be on the life sciences division for signs of healthy activity in the fourth quarter.

Based on the metrics, Corning is a Wait and See. The market for display technology is evolving more than it is diminishing, and Willow Glass is still really, really cool. There are definitely investors who will want to buy in at the bottom — particularly if it drops below $12 per share — but earnings might not climb for a few quarters.

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