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

Chrome: Just Another Free Google Product

The announcement from Google (GOOG) yesterday that it has released a beta version of a new web browser called Chrome has gotten a lot of attention, but shareholders like myself aren't overly enthused. Once again it appears that Google is more about coming out with new free products than it is about its earnings or share price. I have no doubt that Chrome is a solid piece of software, but it also is yet another product from which Google will make no money.

Bullish analysts will likely point out that any product that gets Google.com in front of user eyeballs is a good thing and can only help them gain more market share. That may be true, but Google already dominates the search market. I find it hard to believe that the people who will download and use Chrome aren't already Google.com users.

In my view, a service offering such as free wi-fi supported by Google advertising would be a far better use of the company's product design efforts. It would be far more likely to add incremental revenue than a browser would (by expanding the wireless user base). Google's strategy of making an operating system irrelevant is a bold plan, but it likely won't boost Google's earnings, and therefore, its share price.

Now, I do own Google shares. When I reduced my original position a while ago, my argument was simply that Google was a one-trick pony, and although it was a strong pony, new products that actually generate revenue would be the key for Google to attain a second spurt of growth. So far, we have seen little in the way of progress on that front.

I own the stock because it is cheap (19.4 times 2009 earnings estimates), not because they are boosting their long term earnings potential with any of these free new products. For the stock to really make a huge move back to the old highs this decade, Google needs to find another way to make money other than from search advertising. I'm not convinced Chrome helps on that front.

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

Large Caps on New Low List

In addition to Verizon (VZ), mentioned in my last post, there continue to be attractively valued large cap stocks hitting new lows in the latest market drop. Both of these names sell for about 13 times this year's earnings and 12 times next year's estimates. Pretty cheap valuations for both of them. 

General Electric (GE) ~$30

Fortunately for those who have owned the stock for a while, the days of investors paying 30 or 40 times earnings for this industrial conglomerate are over. With a far more reasonable valuation at hand, investors can actually get some value out of GE shares. Due to the company's high exposure to financial services (they lend money to many big ticket customers to aid in financing equipment purchases), GE stunned analysts by missing first quarter earnings estimates and ratcheting down its outlook for the full year. As a result, GE shares made new lows under $30 per share, yield a dividend of over 4%, and now trade at a discount to the overall market.GE followers are used to the stock fetching a premium to the market, but value investors finally have an intriguing market bellwether to consider adding to their portfolios.

Microsoft (MSFT) ~$27

The Yahoo hangover seems like it will never end, but it will at some point this year. Before the Yahoo offer was made, MSFT's business was clicking on all cylinders and the shares had reached the mid thirties. We can argue whether getting Yahoo would boost MSFT's financials or not, but even if we assume no incremental benefit one way or the other, it is hard to make the case that MSFT shares are only worth 27 bucks. Either way, a move back into the thirties is likely. While it would happen pretty quickly if Yahoo finally decided to remain independent and the end of the saga finally arrived, even a MSFT/YHOO combination would likely result in a higher stock price in the intermediate term, as Yahoo has little bargaining power to extract an excessive purchase price above the $33-$34 offered previously.

Full Disclosure: Peridot clients are long shares of the companies mentioned at the time of writing

Verizon Buying Alltel, Stock Drop Short Lived

When CNBC's David Faber broke the news that Verizon (VZ) was in discussions to purchase Alltel for north of $27 billion, Verizon shares tumbled to $36 on Wednesday. I was getting ready to write that such a drop looked to be a good entry point for fans of the deal (count me as one). Wall Street acts fast though, and today the deal was officially announced and Verizon is up $2 to around $39 per share. Quite the change in sentiment.

The buying opportunity is less attractive now, but Verizon remains an excellent large-cap telecommunications investment on similar pullbacks in the future. They are arguably the most well-run telco and consumers continually rank their wireless network the best in the country.

As for other stocks that have gotten cheap recently, I'll have more details on two other large caps shortly.

Full Disclosure: Peridot clients were long shares of VZ at the time of writing

Taking Some Profits in Apple

Shares of Apple (AAPL) rose nearly $5 today to close at more than $188 per share. The company is faring very well during an overall weak time for consumer spending, thanks to a strong product lineup, and Wall Street is excited over the prospects for the company's forthcoming next generation iPhone.

This overall bullishness is the polar opposite scenario we saw back in February when I wrote that Apple's Valuation Looks Attractive Again amidst worries over a consumer-led recession and a lapse of new product introductions from the company. Since then the stock has soared from $119 to $188, for a gain of 58%. As a result, the shares have gone from very compelling from a valuation standpoint (22x 2008 earnings estimates) to fairly valued in my eyes (34x 2008 earnings estimates) and accordingly I have been taking some chips off the table at current prices.

Apple Stock Performance - 2008 Year to Date

This is not to say the fundamental outlook for Apple has changed (it hasn't), just that the stock no longer looks extremely undervalued as it did several months ago. The company remains a reasonable core technology holding in my view, just no longer in any significantly elevated portfolio weighting.

Full Disclosure: Long shares of Apple at the time of writing, just in less quantity than before

Microsoft Played Brilliantly, Hands Off Negotiations to Yahoo Shareholders

This blog has been rather quiet recently, but things should pick up shortly. I am in the process of relocating and other things have limited my time lately.

This Microsoft (MSFT), Yahoo (YHOO) story just can't get any more interesting. Now that MSFT has walked, what can we expect? Well, YHOO's management team looks like fools, not only for misplaying their hand, but also for taking very lightly their fiduciary duty. Expect YHOO shareholders to revolt. I would not at all be surprised if YHOO is forced to do the deal, because the board really can not say anything to shareholders that remotely convinces them that the company is worth $37 per share or more. When the market thinks you are worth about $20 and someone offers you $33, you take it. End of story.

Even if MSFT really is out for good, this whole thing will help YHOO because it will have to work hard to make meaningful changes now that they balked at such a great buyout offer. The problem is that morale at Yahoo is probably at rock bottom right now, so any sense of renewed independent creativity is easier said than done.

I am still pretty surprised a deal did not get worked out by now, but I don't think we've heard the end of it. If a deal does get done at some point this year, there will likely be an excellent entry point for MSFT created, so investors should keep that mind as this saga continues.

Anyway, the blog will get livelier soon, you have my word on that.

Full Disclosure: Long MSFT and YHOO at the time of writing

No Wonder Yahoo Ads Don't Perform Well

Sports-related ads on Yahoo's sports pages? Sounds reasonable, but evidently there is a diabetes connection to baseball I am unaware of. Something tells me Google would serve up more relevant ads...

Two Big Reasons Why The Google Bears Were Wrong This Quarter

I am getting ready to hop onto a conference call here in a few minutes but Google (GOOG) shares are soaring 60 points in after-hours trading tonight after the company beat estimates on both the top and bottom lines, so I figured I would weigh in briefly. Bears on the stock have been insisting that the weak domestic economy was going to severely impact Google's results, but this view ignored two very important points.

First, Google's core market (online advertising) is not completely dependent on the economy. If the online ad market was mature already, then the bears would have been right. However, online advertising is still growing very quickly as a percentage of the overall advertising market. As a result, lower overall ad spending can actually occur simultaneously with growing online advertising, which is what Google is benefiting from. When you are taking market share, as Google is, those gains can offset much of the decline in corporate discretionary spending.

Second, Google gets 51% of its revenue from overseas. This helps them two ways; exposure to growing international markets, coupled with currency gains due to the weak dollar. In fact, we just saw great first quarter numbers from IBM (IBM), due in part to their very strong presence overseas.

Now, I am not saying Google is completely immune to a slowdown in the United States, that would be naive. However, when you get half of your sales outside the United States and you are taking market share domestically as well, the impact from a weak U.S. economy is not as dramatic as many would have you believe. And this is not only a Google phenomenon, it is a factor behind many of the strong earnings reports we have seen so far this quarter. Investors should keep these things in mind.

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

UPDATE: Friday 4/18 8:30AM

From Reuters:

"Jefferies & Co upgraded Google(GOOG) to "buy" from "hold," saying the Internet leadershowed impressive improvements in converting Web searchers intoadvertising viewers and delivered stellar quarterly results, defying economic headwinds."

Typical Wall Street analyst move... completely worthless upgrade with Google opening up $80 per share. Thanks, Jefferies! 

Yahoo to Outsource Ads to Google for Two Week Trial Run

So much for Steve Ballmer's attempt to get a Yahoo (YHOO), Microsoft (MSFT) deal done more quickly by making threats. Now it looks like Yahoo is really serious about fighting back (or they're just pissed).

This afternoon we learned that Yahoo is going to use search advertising technology from Google (GOOG) on its own site for a two week test period. The goal of this trial, of course, is to see if Google's system can boost Yahoo's advertising revenue substantially. If it can then Yahoo certainly has some ammunition left as it tries to argue that Microsoft's current bid actually undervalues the company.

It is pretty fascinating that in a few short years we have the old search leader (Yahoo) outsourcing its search advertising to the very upstart that took over the top spot (Google). What makes this even more interesting is that some are speculating that if the Google test is successful, Yahoo could choose to merge with AOL, not Microsoft.

Why would that make sense? Well, AOL looks a lot more like Yahoo than Microsoft does, so merging those two companies could yield sizable synergies and help them both slow their path down the road to irrelevancy. Time Warner (TWX) would also benefit not only by unlocking the value of its AOL unit, but also strengthening it by combining with Yahoo.

Google also wins under this scenario. They potentially could take over all of Yahoo's search advertising, which clearly would be a positive growth driver. Google already manages AOL's search advertising and owns 5% of AOL, so a Yahoo-AOL deal strengthens that investment too.

The lone loser here would be Microsoft, in their eyes anyway. Wall Street would likely cheer and send Microsoft shares higher. Remember, MSFT shares were in the mid thirties before the Yahoo bid and dropped to the high twenties on news of the hostile offer. The other option, of course, would be for Ballmer to raise his bid to try and squash an AOL deal.

Whether you own shares in these companies or not, if you are interested in how the Internet landscape is going to shift, this saga is pretty darn interesting. Stay tuned.

Full Disclosure: Long shares of GOOG, MSFT, and YHOO at the time of writing

UPDATE:
Now rumors are that News Corp (NWS) could team with MSFT in a higher bid. Here is my question: Why did it take an unsolicited bid from MSFT for these Internet companies to actually start discussing bold moves to boost profits and shareholder value? These companies were perfectly fine making no progress competitively but now they all of the sudden have a "reason" to get creative and make some positive changes? Better late than never I guess, but these companies don't need buyout fights to do something bold. Standing still against upstart companies (like Google was five years ago) is essentially moving backwards.

Motorola Valuation - Part 2

Last I month I asked the question "Are Motorola Shares a Bargain at Nine Bucks?" To help answer that I decided to do rough valuations for each of the company's major business segments (mobile devices and networking/mobility). Carl Icahn has been involved with Motorola (in fact he won two board seats from the company this week) and has been calling for the firm to spin off its cell phone business, which they have agreed to do sometime next year. Hence, my desire to value each segment separately.

I came up with an ~$8 value estimate for the non cell phone division (Motorola Valuation - Part 1). With Motorola trading at $9 and change right now, the market is essentially saying the cell phone business is worth next to nothing. Below are my estimates for that segment. My main assumption is a 5% operating margin (half of the 2004-2006 average due to more intense competition nowadays) and relatively steady sales from here on out. As always, I try to be realistic, and this is by no means an extremely optimistic projection.

As you can see, the cell phone segment might not be worth anywhere near what it would have fetched between 2004 and 2006, but it does appears Wall Street is too pessimistic about Motorola. Investors are getting the business for less than $2 per share (according to my numbers), which should prove conservative if the new CEO for the phone business can get it back into the black as early as next year.

If you add my two segment valuations together, you get a per share value of $11.50 for Motorola, which is about 20% above current levels. I can understand Carl Icahn's interest, although he clearly was too early on this one, getting in at much higher levels.

Full Disclosure: No position in MOT at the time of writing