Weekly Issue: Keeping our eye on the ball as the market gyrates on earnings of the day
As we mentioned in this week’s Monday Morning Kickoff, we are indeed heading deeper into 3Q 2017 earnings season and that means the pace of reports is going to pick up with each passing day. On Monday, I shared which companies on the Tematica Investing Select List will be reporting earnings this week as well as how the Wall Street herd is catching up to our bullish thoughts on Cash-Strapped Consumer investment theme company Costco Wholesale (COST) and Disruptive Technology investment theme company Applied Materials (AMAT).
Yesterday I shared my thoughts on why subscribers should NOT catch the falling knife that is Blue Apron (APRN) shares – in a nutshell, Blue Apron is facing too many thematic headwinds and other issues after recently going public. My analysis also suggests a painful secondary offering is in the cards for this company, and my thought is we should sidestep this ongoing disaster and fish in more fruitful waters. Also yesterday, Disruptive Technology investment theme company Corning (GLW) issued solid results and an upbeat outlook that moved the shares higher – more thoughts on that below.
Taking a Higher View of the Market
What we are currently seeing is a day to day fluctuation in the stock market based on the earnings reports of the day. Last Friday, General Electric (GE), Proctor & Gamble (PG) and Honeywell (HON) weighed on the market. That same downward pressure continued on Monday following results from Whirlpool (WHR). Yesterday, positive quarterly results from Caterpillar (CAT) and 3M (MMM) had the major market indices retracing their way higher. As these market moves occurred, I’d note U.S. Treasury yields hit their highest since March, but at the same time, CNNMoney’s Fear & Greed Index has continued to climb higher into Extreme Greed.
What this tells us is the market is likely to be somewhat schizophrenic based on what it hears. As the frequency of reports spikes later this week and next week, we are bound to see some wobbles in the market. Keep in mind that tomorrow (Thursday, October 26th), we will see more than 340 companies report, including Amazon (AMZN) and Alphabet (GOOGL), and those will set the tone for how the markets finish out the week.
As the litany of reports is had over the next 13 trading days, we’ll continue to use our thematic lens to ferret out confirming data points and examine new positions for the Tematica Select List. As we do this, we’ll look for opportunities to improve our cost basis in existing Select List positions, and, if need be, jettison any that are seeing their thematic tailwinds become headwinds.
Solid earnings from Corning, keeps our Buy rating intact
Yesterday, Disruptive Technology investment theme company Corning (GLW) reported 3Q 2017 results that were ahead of expectations and the company offered an upbeat outlook for what’s ahead in the coming quarter but fell shy of issuing formal guidance. For the quarter, the company reported EPS of $0.43 vs. the expected $0.41 on revenue that was modestly better than expected — $2.61 billion vs. the consensus expectation of $2.59 billion.
Parsing through the report, nearly every Corning business segment reported sequential revenue and earnings improvement with one exception. That exception would be the company’s core Display business, which while second from a revenue percentage basis behind Optical Communications, is the clear profit breadwinner for the Corning. As a reminder, these two businesses — Display and Optical Communications — account for the bulk of Corning’s sales and earnings, roughly 67% of sales and 74% of operating profits. As such, these are the two key drivers of the company’s performance and the ones we will continue to focus on.
If there was one wrinkle in the report, it was that recent wins in the Display business unit led to Corning’s operating profit to slip year over year. The sequential ramp in operating expenses for the Display business is tied to the launch of its Gorilla Glass. This new product is not only a key stable of smartphones like Apple’s (AAPL) iPhone, but Corning is launching it into new markets and applications such as gasoline particulate filters, pharmaceutical glass packaging, and other automotive applications, including replacing the conventional auto glass. Walmart (WMT) recently introduced a new line of screen protectors under the name Blackweb, which uses Corning glass. And the company continues to garner wins at smartphone OEMs in emerging regions including new devices at Positivo in Brazil, LAVA in India and Polytron in Indonesia.
All of these new wins led to a sequential dip in margins for the Display business unit. We expect, however, for margins to rebound as start-up expenses associated with these recent wins fade in the coming quarters. That fade was offset by profit improvements in the company’s other businesses, especially Specialty Materials, that led to the sequential profit improvement reported by Corning.
Now, you’re probably thinking – how did the company deliver an EPS beat when its operating profit fell?
The answer is in its active buyback program, which shrank the outstanding shares by more than 8% year over year. Since announcing its plan to return more than $12.5 billion plan to shareholders in the form of stock repurchases and dividends, Corning has already returned $8.5 billion by shrinking its outstanding shares by nearly 30%, increased its dividends twice in as many years and intends to increase the dividend by at least 10% annually in 2018 and again in 2019.
When we added GLW shares to the fold exactly a month ago, we noted the company had a robust plan to return capital to shareholders. Today’s report shows the company is on track with that plan, and we suspect the management will highlight this progress on the earnings call.
All in all, we would sum the report up as being solid and expected, something investors like. We continue to see larger format displays sizes for TVs and smartphones as well as the adoption of newer connected devices in cars, homes and on people spurring demand for the company’s Display business. We also see a similar pick up in demand for the company’s Optical Fiber business as 5G wireless networks transition from beta to commercial deployments.
- We continue to rate Corning (GLW) shares a Buy with a $37 price target.
