Tuesday, April 28, 2009

Corning (NYSE:GLW): Downgraded to Market Perform at Sanford Bernstein

Sanford Bernstein notes that despite Corning's (NYSE:GLW) strong results and near-term guidance, they are downgrading Corning to market perform because they believe that expectations and the stock price are now appropriately aligned. Firm's end-of-year estimates assume reasonably robust expectations for consumer demand and that leading Korean brands continue to use Taiwanese panel manufacturers as "swing capacity" (but less aggressively than in 1Q09). If their forecasts are in error, they think downside is more likely than upside.

Despite the possible upside, in the near term, Bernstein is more concerned about downside risks including:

Korea taking share or cutting Taiwanese orders more aggressively than the firm models. While they believe Tier 3 brands will occasionally deliver hit products, they expect Samsung, Sony and LG to continue as leading brands throughout 2009. Primary manufacturing remains in Korea, and, as they've learned over the last few quarters, Korean manufacturers will trim Taiwanese orders rapidly as demand drops.

Pricing in the wholly-owned business remaining weak as Taiwanese panel manufacturers continue to struggle and supply chain cyclicality increases pricing pressures. Taiwanese panel manufacturers shipped 52 million panels in 2Q08. The maximum quarterly shipments they see through the end of 2010 is 50 million, with much more pronounced cyclical fluctuations than in the past, which could result in pricing erosion greater than in the past.

Consumer demand for LCD televisions slows. Corning predicts that unit demand for LCD televisions will grow 18% in 2009, and Bernstein thinks that this is consistent with their s-curve modeling and retail data through 1Q09. They would be surprised, however, if consumers started purchasing televisions faster than the s-curve rate. Firm's model, which assumes ~5% lower unit aggregate TV demand than Corning's, predicts 12% growth for LCD TVs in 2009

They decrease FY09 EPS from $0.94 to $0.90 and FY10 EPS from $1.11 to $1.06.

Notablecalls: Bernstein was one of the early firms to make a positive GLW call, so I think this downgrade carries weight. Not saying GLW will get whacked on this but I see it trading close to $15 level today.

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