Despite Earnings Warning, Corning Retains Strong Balance Sheet & Market Position

There are many times, particularly in bear markets like this one, when I look at a company and am quite baffled as to how investors can let a stock drift so low. Then I remind myself that Wall Street is short-term oriented and only cares about today, this week, and maybe this month. What the reality will be a year or two from now is ignored, which creates the very investment opportunities that long term, value-oriented investors like myself focus on.

I have been a long time investor in Corning (GLW), a leading provider of glass for LCD displays as well as fiber optic cable for the telecommunications industry. The company possesses strong market positions in its two core businesses, has a strong balance sheet, and could generate growth from a budding environmental products division in the years to come.

Given that GLW’s main business is supplying glass for LCD displays (think flat screen televisions, computer monitors, etc), quarter to quarter financial results can vary greatly based on the supply and demand dynamics of the end markets GLW serves. That said, the company has been generating strong double digit earnings growth and has built up a net cash position of more than $5 billion, or $3 per share.

After producing several strong quarters in a row, GLW warned on its third quarter recently and as a result 2008 earnings estimates have been sliced from $1.93 to $1.82 per share. The stock, meanwhile, has cratered to around $16 per share. The only conclusion I can draw is that the adverse reaction to the earnings miss is an overreaction. Corning is surely not immune to an economic slowdown by any means, but even if the company only earns $1.70 this year, the stock trades at less than 10 times earnings and investors are getting the operating businesses for only $13 per share (given $3.30 per share in net cash on the balance sheet).

Even if growth rates slow as the global economy sputters through this business cycle, it is hard to argue that GLW shares will remain in the teens for an extended period of time, unless global demand for LCD glass really falls off a cliff and takes years to recover. While anything is possible, I still consider GLW a growth company that can grow earnings per share by 10 percent or more over the next three to five years. As a result, I am adding the stock to the Blog Model Portfolio at the close of trading today.

Full Disclosure: Long shares of GLW at the time of writing