By Balasubramanyam Seshan: Subscribe to Balasubramanyam's RSS feed
August 20, 2010 10:45 AM EDT
Jefferies & Co. downgraded rating of specialty glass maker Corning Inc. to Hold from Buy, on concerns of a supply chain correction. The brokerage lowered its price target on Corning to $18.25 from $24.
“Our views are based on conversations with industry contacts in recent days as well as commentary we picked up at this week's DisplaySearch conference in San Jose, California. Also, we've picked up a significant collection of data points from the supply chain coming out of the second quarter earnings season. We’re incrementally more concerned about the potential for a more significant supply chain correction in Q3,” said George Notter, an analyst at Jefferies.
The analyst said Corning currently trades at 7.8 times of 2011 EPS estimate of $2.05. Relative to the 13.0 times of industry average, it seems that investors already expect Corning's guidance to come down.
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George Notter looked back at Corning's stock price performance during a similar second quarter of 2006 inventory correction as a proxy for how the stock could perform over the next few months.
Based on this analysis, the analyst said he wouldn't be surprised if Corning's shares grow weak a bit more. At a minimum, he says the shares probably can't work for a while as investors work through ongoing data points about a potential supply chain correction in coming months.
“We expect that the shares probably can't work for a while as investors work through ongoing data points about a potential supply chain correction in the coming months. We still like the long term fundamentals of the business,” said Notter.
The analyst recognized that current supply chain issues are shorter term in nature. Moreover, the analyst’s larger thesis on Corning still hasn't changed based on his prior analysis of global TV penetration rates, he believes that the size and trajectory of LCD TV market will ultimately be larger than investors expect.
Also, the analyst says his model is still on the conservative side regarding potential Gorilla Glass sales in 2011.
The brokerage lowered its 2010 EPS estimate of Corning to $2.08 from $2.15 on lower sales and margin assumptions for the wholly-owned and SCP Display businesses, while maintaining its 2011 estimate of $2.05.
Corning shares closed Thursday down 4.13 percent at $16.03 on the NYSE, while in after-hours the stock rose 0.87 percent to trade at $16.17.
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