Does This Glass Giant’s Goldman Sachs Group Inc (GS) Downgrade Make Sense?

In addition to the growth in ET and specialty segment, I see the combination of a secular decline in the CAPEX requirements of the LCD business and the potential for higher dividend distributions from Corning’s two joint ventures as driving strong free cash flow generation in the coming years (the sell-side estimates are ~$1.6bn in 2012, ~$1.5 billion in 2013, and ~$1.5 billion in 2014). Given that management has already shown willingness to return cash to shareholders through both a buyback program and two rounds of dividend increases, I see potential for further shareholder-friendly cash distributions in the medium to long term.

Upside/Downside Scenarios

The biggest issue facing the company is glass pricing, particularly in light of the recently introduced market share/pricing strategy. Assuming the strategy succeeds in driving minimal 1-2% quarterly declines in industry glass pricing, the sell-side sees an upside for 2013 EPS to ~$1.45. This suggests an upside case of $18 with a forward multiple of 12. The downside for the shares seems to be limited to $11, based on ~0.8 times tangible book value.

Valuation Analysis

The company’s shares are currently trade at a forward P/E multiple of 9.9, which is lower than the ~10.4 average forward multiple over the last five years. The shares also trade at 0.87 times book value, which is slightly below the 0.9-times average over the last year, and well below the 1.8-times average over the last five years.

Foolish Bottom-Line

On the back of cheap valuations and a solid future for Gorilla glass, Corning is recommended as a buy.

The article Does This Glass Giant’s Goldman Downgrade Make Sense? originally appeared on Fool.com.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.