After 80% Rally What’s Next For Corning Stock?

by Trefis Team
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After more than an 80% rise since the March 23 lows of this year, at the current price of around $32 per share we believe the stock price of Corning (NYSE: GLW), best known for its gorilla glass, display panel, and optical fiber, has reached its near term potential. GLW stock has rallied from $18 to $32 off the recent bottom compared to the S&P which moved over 50%, with the resumption of economic activities as lockdowns are gradually lifted. However, Corning stock is up only 7% from levels seen in early 2018.

Corning stock has not only fully recovered to the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic, it is now up 15% from the pre-crisis levels. This seems to make it fully valued, despite the company receiving federal funding for its Valor glass.

Some of this 7% rise of the last 2 years is justified by the roughly 14% growth seen in Corning’s revenues from 2017 to 2019, though earnings were up only 10% due to a 15% net margin contraction from 16.2% to 13.7%.

With the company’s margin decline over recent years, its PE multiple has contracted slightly. We believe the stock is unlikely to see significant upside after the recent rally and the potential weakness from a recession driven by the Covid outbreak. Our dashboard, “What Factors Drove 7% Change in Corning Stock between 2017 and now?“, has the underlying numbers.

Corning’s P/E multiple changed from 19x in 2017 to 16x in 2019 based on trailing earnings. While the company’s P/E is now at 18x given the recent rally, there is a downside when the current PE is compared to levels seen in the past years, P/E of  16x at the end of 2017 and 2018.

So what’s the likely trigger and can the stock stick to recent gains?

The global spread of coronavirus has led to several restrictions in various cities across the globe, which has affected industrial and economic activity. Several companies have cut capex plans, which directly impacted Corning’s telecommunications business segment. In fact, all but the Specialty Materials segment have seen revenue decline in Q2 2020. Last month, the U.S. Department of Health and Human Services made a $204 million payment to Corning as part of Operation Warp Speed, for Corning to expand domestic manufacturing for Valor Glass vials, which will be required for vaccine manufacturing. This is an important development for Corning, even from the long term view given the demand for vaccines will remain high over the coming years. While this is a positive development for Corning, we believe that the stock appears to be trading at a high multiple. We estimate 2020 EPS to be around $1.15, and at the current price of $32 a share, GLW is trading at 28x its forward earnings. This compares with trailing PE multiples of 19x in 2017, 16x in 2018 and 2019. We thus believe GLW to be fully valued at the current levels.

Over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, valuations become important in finding value. Though market sentiment can be fickle, and evidence of a sustained uptick in new cases could spook investors once again. As such, the recent gains in the stock may stick, but any significant upside from the current price is unlikely in our view.

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