Trimming Back on Corning

Corning updated its calendar third-quarter outlook ahead of a conference presentation Friday morning.

The big surprise was impact from Samsung [of Korea] cutting glass volumes 30% for the calendar third quarter, which would impact

Overall, Corning's own glass is tracking mostly in line to end-market expectations of slower retail, inventory reductions and slightly lower sequential-flat Gorilla glass.

Based on the revised guide, we have adjusted our estimates and lowered the price target to $24 [from $26].

Corning says retail-TV sales have held up better in the U.S. and China. Europe and especially Japan are seeing some weakness after the digital-TV switch over. Retail-channel inventory is lower as TV original equipment manufacturers (OEMs) are conservative and cautious on the consumer outlook for the second half of 2011. Corning notes panel and TV OEMs have cut inventory substantially. Also, Korean OEMs cut back output significantly. Corning Precision Materials (SCP) Volumes: down 30% quarter-over-quarter and affecting primarily the equity earnings for Corning.

Corning says wholly-owned glass outlook is flat quarter-over-quarter versus prior up 5%-8% quarter-over-quarter. Glass at SCP is expected to decline 30% quarter-over-quarter versus prior down 5% quarter-over-quarter.

Gorilla glass is expected to be flat quarter-over-quarter versus prior up 10% quarter-over-quarter.

Telecom is tracking in line with expectations and is a source of strength through year-end.

On the capital-expenditures side, Corning noted calendar 2012 estimated capex will be down to $1.9 billion-$2 billion (already announced previously), but also mentioned it has additional levers to reduce 2012 estimated capex, and expects to use the improving free cash flow to return value to shareholders (dividends/buybacks). Corning is lowering some operating expenses and selling, general and administrative costs (SG&A) in the quarter.

We are lowering our calendar third-quarter revenue and EPS estimates from prior $2.03 billion and 49 cents, respectively, to $1.98 billion and 43 cents, respectively, and lowering calendar 2011 revenue and EPS estimates from $8.1 billion and $1.98, respectively, to $8 billion and $1.84.

Our calendar 2012 revenue and EPS estimates go from $9.03 billion and $2.26, respectively, to $8.7 billion and $2.01, respectively.

Our new $24 price target is a conservative 12 times multiple to our calendar 2012 EPS estimate of $2.01, versus its five-year historical range of six times-27 times forward price/earnings multiple, and a 1.4% dividend yield.

We should note that the chief financial officer stepped in to buy shares on Aug. 10 with Corning trading at about $14; we believe $14 should provide a reference level for investors. With solidly-improving free cash flow into calendar 2012, we believe Corning should be able to implement some shareholder-friendly actions including dividend raises and share buybacks.