A harsh light on Corning

Corning's quarter might look great on paper, but that's because it gets an easy year-to-year comparison.

By Jim J. Jubak Jan 4, 2010 4:30PM

Jim JubakHere's the dilemma that Corning (GLW) presents to investors right now. It's one that we'll face a lot in 2010, with all kinds of stocks.

The Wall Street consensus says that Corning will announce earnings of 42 cents a share when it reports fourth-quarter 2009 earnings on Jan. 25.

That would be a huge 223% increase in earnings from the 13 cents a share the company reported in the fourth quarter of 2008.

So, why not hold onto the stock? No need to sell just because the shares have hit my $19 price target, right? 

At $19, Corning sells for just 14.3x projected 2009 earnings. That's without a doubt cheap for a company that's growing earnings at 223%.

The problem is that it doesn't look like Corning is going to grow earnings by 223% in 2010. Or by 123%. But more like 23%. And just about all of that growth will be stacked into the first half of 2010. In the second half of 2010, Deutsche Bank projects that Corning will grow earnings by just one penny. That works out to 1.2% growth.

(I think that as investors get further into 2010 they will see a lot of stocks with this kind of earnings growth pattern -- big growth in the first half of the year on easy year-to-year comparisons and meager growth in the second half on tougher comparisons with post-economic-bust quarters.)

The Wall Street consensus is that Corning will grow earnings by just 6.7% a year for the next five years. That includes the 163% projected earnings growth in the first half of 2010.

If Corning were set to grow at 23% in 2010 and if that were the long-term growth rate, then Corning would be cheap at 14.3x projected 2009 earnings. The P/E-to-earnings- growth ratio (PEG ratio) would be just 0.62. That's way under the PEG ratio of 1 that classically defines growth at a reasonable price.

But if Corning's long-term growth rate is just 6.7%, then this is a very overpriced stock with a PEG ratio of 2.1.

At Monday's price of $19.71, I think the stock trades with too much risk for the likely return over the next year. So, I'm selling these shares out of my Jubak's Picks portfolio today with a 25% gain since I added them to that portfolio on October 12, 2009.

If you are an aggressive trader, you can hold on until closer to the Jan. 25 reporting date on the hope that the stock's momentum will carry it higher in anticipation that the company will beat expectations. Or you can hold on deeper into January in the hope that January 2010 will be as kind to stocks as most Januarys have been. (For more on the January pattern, see this post).

If you're a long-term investor who follows my Jubak Picks 50 portfolio, I suggest you hold on to Corning. The company has significant new businesses that make the 6.7% growth rate that Wall Street projects way too low over the long term. (Those new businesses, however, will take time to reach the size of the company's existing fiber optic and flat screen glass businesses. Even a long-term investor, of course, could sell and then buy back during what looks like a disappointing second half of 2010.)

Jim Jubak plans to sell his personal position in Corning three days after this is posted.

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