Should You Buy Corning Stock At $36?

After a solid 2x rise since the March 23 levels of this year, at the current price of around $36 per share we believe Corning stock (NYSE: GLW), has reached its near-term potential. GLW stock has rallied from $18 to $36 off the recent bottom, outperforming the S&P which moved 64% over the same period, with the resumption of economic activities as lockdowns are gradually lifted. This outperformance can be attributed to better than estimated quarterly results and increased demand for premium glass products, primarily related to IT products given the work from home trend, including Valor, which are medical glass vials that can be used for Covid-19 vaccines. GLW stock is also up 11% from levels of $32 seen in early 2018, two years ago.

Some of the 11% rise of the last 2 years is justified by the 13.7% growth seen in Corning’s revenues from 2017 to 2019. The company saw a 14.9% growth in total shares outstanding due to share issuances, resulting in a -1% change in revenue per share (RPS) to $13.30 in 2019, compared to $13.43 in 2017. With a modest decline in RPS, the company’s P/S (price-to-sales) ratio also contracted. We believe the stock is likely to see downside after the recent uptick and the potential weakness from a recession-driven by the Covid outbreak. Our dashboard, ‘What Factors Drove 11% Change in Corning Stock between 2017 and now?, has the underlying numbers.

Corning’s P/S multiple changed from 2.4x in 2017 to 2.2x in 2019. While the company’s P/S is 2.7x now, any significant growth is unlikely, when the current P/S is compared to levels seen in the past years, P/S of around 2.4x at the end of 2018 and 2.2x as recently as late 2019.

So what’s the likely trigger for Corning?

The global spread of Coronavirus has impacted the sales of Corning due to a decline in capital spending from some of its customers as well as pricing pressure for its display glass products. That said, the company is now seeing a rebound in demand, and it posted a 2% y-o-y sales growth in Q3. The company’s total revenue in the first three quarters of 2020 was down 8.4% y-o-y to $8.0 billion, while the adjusted earnings of $0.25 per share reflect a 77% decline over the $1.10 figure reported in the prior year period, primarily led by higher operating costs owing to the pandemic. Looking forward, with economies opening up gradually and availability of vaccines, the capital spending on 5G is expected to rise, boding well for Corning’s optical fiber business, while the company will also see higher sales of its glass vials that are being used for Covid-19 vaccines. Also, the new Apple iPhone 12 uses ceramic shield, manufactured by Corning, and iPhone 12 sales alone are touted to be in the range of 80 to 100 million units by October 2021, again boding well for Corning. That said, much of these factors appear to be priced in the current stock value of $36, despite the expected recovery in demand post Covid. In reality, 2020 full year revenues are estimated to see a decline of 3% to $11.3 billion, while earnings are expected to be down 22% to $1.37.

Looking at the broader economy, the actual recovery and its timing hinge on the containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. 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, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again. At levels of around $36, GLW stock is trading at 2.4x its 2020 expected RPS of $14.83. This compares with P/S of 2.4x seen in 2017 and 2018 and 2.2x seen in late 2019, making the stock seem fully priced.

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