Corning (GLW) Raises Guidance for 2nd Time in 5 Weeks Due to.... What Else? China

Submitted By Trader Mark
Corning (GLW) is a very interesting situation situated at the far end of the supply chain (very close to the end consumer) - it has been posting some positive data points the past few months but what does it tell us overall? The tech sector has been the one area of sustained domestic out performance for the 1st half of 2009 - some of this is due to stronger than average balance sheets (high cash, low debt), some of it is due to "playbook" - especially in the semiconductor space. When you believe the economy is turning around one of the early cycle sectors you run into (en masse) is semis...

So while the world was in a cocoon like state from fall 2008 to mid winter, inventories were drawn down and orders fell off a cliff in most areas of the economy, including most of the "technology" space. Now the big arguement is whether this "restocking" cycle that in retrospect has been happening the past 2-3 months is a 1x event to make up for the cocoon stage, or the first signs of re-accelerating global growth. And how much is do to government transfer payments to its citizens, and how much is pure demand. Without making an arguement one way or the other - let's look at Corning; which is not a "semi" stock, but perhaps might be a similar type of indicator.

Corning Incorporated manufactures and processes specialty glass and ceramics products worldwide. It operates in five segments: Display Technologies, Telecommunications, Environmental Technologies, Specialty Materials, and Life Sciences.
While there are 5 business segments, Corning is basically 2 major business lines which make up 75% of sales: (1) "display" (LCD that go into TVs and computers) and (2) telecommunication - fiber optic product of all types. Even more importantly perhaps is 50%+ of sales now come from Asia, so much like an International Business Machines (IBM), or Yum! Brands (YUM) - what we think of as an "American company" is really being driven by sales overseas.

So along with the restocking question, we have to decipher if any company / sector specific growth is due to stable (or stimulus happy) parts of Asia, or if its part of a bigger mosaic of worldwide recovery. All good questions which will only be answered full when we look back in a year and have 20/20 hindsight as our friend.

But for now, the Chinese - especially those of the TV buying kind - seem to be driving Corning's sales surge. What is interesting over and above the news is the stock reaction. Again, it is NOT the news but the REACTION to the news that matters - Corning announced this uptick in sales yesterday morning but the stock traded down on the day. Hence, one might assume the good news is already "baked" into the stock.

Let's delve deeper into the actual upside and drivers.

Corning (GLW) CFO James Flaws this morning said in a statement that second-quarter glass demand “is much stronger than we anticipated even a few weeks ago.” He says the company now sees Q2 sequential volume up about 100% in its wholly owned business. That is up from an original forecast of 50% growth, which had been revised up to more than 75% at the end of May.
Flaws noted that the company met much of the improved demand by drawing down inventory, but that has it also has begun shipping glass from melting tanks restarted earlier in the quarter.
Flaws second quarter prices were “moderate,” with smaller price declines than in Q1. He says Q2 supply chain inventory is about even with the start of the year, which he says is a positive sign.
Driving demand is continued strong demand for LCD televisions. He notes that April LCD TV sales were up 22% in Europe and 77% in China. In May, he says, LCD TV sales were up 48% in Japan. In the U.S., growth slowed in April, but he says “reports that we have received indicate a significant upward spike in domestic LCD TV sales in late May and the first three weeks of June.”

So why the "eh" reaction in the stock?

Share reaction was muted, however, as analysts said investors had expected the move by Corning and were concerned that the improvement in demand might be short-lived.
"To some extent investors fear a repeat of what happened in 2008 when Corning was bullish in the first half but saw a fall off in demand for glass in the second half," said Morgan Keegan analyst Paul Bonenfant, but added that he did not agree with that view.

This will definitely be one of the stocks to watch in the 2nd half 2009 due to its extremely cyclical nature.

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