Corning's Earnings: Display Tech Looks Good, Telecom Bad

This was something of a mixed quarter for Corning (GLW). EPS was better than expected, but guidance, especially on revenue, was less than enthusiastic.

In context, GLW’s management is fairly sober and tends to prefer to surprise to the upside than shock to the down, so it often moderates its position. Some could be worried about several trends, however, mostly related to a lack of pick-up in telecom (despite equipment makers showing large gains) and poor pricing in LCD glass. GLW, however, is making some market share gains, due to competitor Asahi’s plant being down (what’s curious is that despite this curtailment in supply, pricing power has not returned). The strong yen is also tempering management’s forecast.

The Good:

• EPS beat by four cents.
• Mitigating factors: The company's revenue came in slightly light to consensus and there was about two cents of noise in the beat (still a beat however).
• It can be guessed that the recent price movement in the stock suggests that people knew this was coming.
• Gross margins were solid and above expectations.
• It was another good quarter from display tech, showing no real slowdown in final demand for LCD screens.
• There was solid order backlog.
  • Mitigating factor: pricing power has not improved, leading some to think that demand might be weaker than it appears or that the product is becoming more commoditized.
• Credit metrics were improved.

The Bad:

• Telecom: This division just does not seem to be getting on track.
  • Revenue disappointment this quarter and in guidance is largely coming from telecom. The Street was expecting a 5% sequential decline for next quarter. GLW guided for a 20-25% decline.
• LCD pricing: see "The Good."
• The numbers are partly reflecting a lower marginal tax rate (about 1 cent of noise).
• EPS guide, despite the beat, the company did not raise estimates.

The Ugly:

• Nothing really, but telecom could get ugly.

Bottom-line: The Street should see this quarter as a neutral and given recent run-up/sell-off in stock, it can be expected that any reaction will be muted and that this number will get pretty easily digested. The only worry is that with telecom again failing to perform, even in-line with already poor expectations, GLW is really becoming a one-product company and that product is becoming increasingly commoditized. Also, that one product is extremely reliant on consumer discretionary spending. These worries, however, seem to be priced into the company’s volume. This still may be a good short volume name.

Steve Zausner contributed to this article.