25% Downside For Corning Stock?

Despite a 22% decline in Corning’s (NYSE: GLW) stock since the beginning of the year, at the current price of around $22, Corning’s stock could see a significant downside, due to the impact of the coronavirus crisis. Corning stock has underperformed the broader markets between 2017 and now. Corning stock is down 25% since the start of 2018, a little over two years ago, as compared to a 7% growth for the S&P 500. Our dashboard, ‘Corning Downside: How Low Can Corning Stock Go?‘ provides the key numbers behind our thinking, and we explain more below.

One of the contributors to Corning’s stock price decline over the last two years has been the contraction of its P/E multiple, which, on a trailing basis, declined from about 18.8x at the end of 2017 to 16.4x at the end of 2019, and is 12.8x currently. While the company’s business saw its sales grow 14% between 2017 and 2019, the adjusted net income margin declined 250 bps from 16.2% to 13.7%. This decline was led by lower sales for Display Technologies and Optical Communications segments, resulting in lower factory utilization. Margins were also impacted by accelerated depreciation and asset write-offs. Overall, this impacted the EPS growth, and the P/E multiple declined.

So what’s the likely trigger and timing to this downside?

The current coronavirus and oil price crisis will likely have a significant impact on Corning’s business, due to their impact on the global economy. With the current COVID-19 pandemic, many cities are under lockdown, and there is restricted movement of people. Even after the lockdown is lifted, people will likely avoid unessential movement. As such, the demand for products such as television, smartphones, and automobiles is expected to decline in the near term. In fact, the demand for LCD TV and smartphones is expected to see a low-double-digit decline in 2020. Apple’s iPhone handsets are also expected to see a decline in the mid-teens percentage. This directly impacts the demand for Corning’s glass products. On the macro front, a high unemployment rate, and slower economic growth will result in lower consumer spending power.

Corning recently reported its Q1 results, which though they came in better than street estimates, confirmed the trends above. The company reported sales of $2.4 billion, down 15% (y-o-y), reflecting a sales decline across Optical Communication, Display Technologies, and Environmental Technologies segments. Corning continued to achieve steady growth across Specialty Materials, and Life Sciences segments. Looking at the bottom line, adjusted EPS declined 50% from $0.40 in Q1 2019 to $0.20 in Q1 2020. The company also withdrew its guidance for 2020, and it stated that Q2 margins will be lower than Q1. Note that Q1 adjusted gross margins came in at 33%, a whopping 700 bps lower from prior year quarter levels of 40%.

As such, we consider a scenario for 2020, with investors revising their expectations for the full-year revenue to be closer to $10.3 billion, about 2% higher than 2017 revenue of $10.1 billion, and 10% lower than the 2019 revenue of $11.5 billion. The market isn’t going to stomach this well, and this is reflected in Corning’s current P/E multiple of 12.8x, which is 32% lower than the 18.8x level seen toward the end of 2017. This would mean a double whammy of 24% lower earnings and 22% lower P/E multiple (from 2019 levels), translating into Corning’s price drop of 25%, to about $17 or lower.

Will such a drop be justified? Absolutely not. However, investors who are first out the door in a panic selling situation take a smaller hit to their portfolio. The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

We do believe these trends are likely to reverse over the next few quarters, and as the coronavirus crisis is tamed, higher revenue and earnings expectations will replace the dire scenarios that are easily imagined during difficult times.

Do you know what factors drove Corning stock’s 25% decline since 2017. 

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture and complements our analyses of the coronavirus outbreak’s impact on a diverse set of companies, including Union Pacific and Adobe. The complete set of coronavirus impact and timing analyses is available here.

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