Corning – Handle with Care
Corning looks set to have a busy year, with expansion expected in the smartphone and LCD markets; however, falling LCD prices and issues in its supply-chain may be a damper on growth
Corning Inc. (GLW) is a global leader in specialty glass and ceramics. The 163-year-old company, incorporated in New York in December 1936, has emerged as a star player in 21st century consumer electronics, with its reinforced glass used to protect everything from smartphones to TVs. However, recent supply chain issues and an overreliance on LCD manufacturers continue to threaten the company’s future growth prospects, and we recommend this stock as a hold for now.
The company, once known primarily as a manufacturer of cookware and railroad lanterns, now operates in five business segments, namely: Display Technologies, Telecommunications, Environmental Sciences, Life Sciences, and Specialty Materials. The company is an industry leader in all segments, and expects growth across its businesses in 2014. However, the company has achieved most of the current recognition it enjoys through one product: Gorilla Glass.
Gorilla Glass is a reinforced glass used in the manufacturing of many types of everyday consumer electronics. It is currently a staple for companies like Samsung (SSNLF), Apple (AAPL), LG, Dell (DELL), Google (GOOG) and Nokia (NOK), who use it as scratch-resistant protection for LCD displays, among other things. Given its popularity and applications, Corning has continued to invest heavily in the development of this technology.
The Display Technologies segment manufactures glass substrate, which is an essential element in the manufacturing of active matrix liquid-crystal displays (LCDs). The glass substrates fabricated by Corning are used in almost every display screen in modern consumer electronics, including in notebooks, flat panel desktop monitors and LCD TVs. The company earns almost 36% of its revenues through sales of display technologies.
In the past, the company was affiliated with Samsung under Samsung Corning Precision Materials Co. Ltd, of which it owned 50%. However, it will acquire full ownership of the venture by the end of January 2014. Samsung Electronics and Corning also have equal stakes in Samsung Corning Advanced Glass LLC.
Corning’s Telecommunications segment produces optical fiber and cable, hardware and equipment for the telecommunications industry. The company is recognized for having invented the world's first low-loss optical fiber.
Applications for products manufactured under the Telecommunications segment include optical fiber for local area networks, data centers and metropolitan networks. Corning earns 27% of its overall revenues through this segment.
This segment focuses on ceramic substrates and filter products used in carbon emission control systems. The company has continued to improve its products to cater to changing needs as global emission controls get stricter. It sells its products to emission control system providers, who sell them to industries that are heavy polluters.
12% of the company’s revenues are generated by this segment.
The Specialty Material segment offers 150 different formulations of glass, glass ceramics and fluoride crystals to meet customers’ unique needs. This segment caters to several industries, including display optics and components, semiconductor optics components, and aerospace and defense. Corning’s famous Gorilla Glass is manufactured under this segment.
Specialty materials generate 17% of Corning’s revenues.
Under this segment, the company produces laboratory products, including general labware and equipment.
Life Sciences, contributing 8% of the company’s revenues, is Corning’s smallest business segment.
Given that its customer base is composed mostly of consumer electronics manufacturers, 61% of Corning’s revenues are generated in the Asia-Pacific region, where companies like Samsung, LG and HTC are based. North America contributes 27% of the company’s revenues, while European businesses pitch in 9%. Latin America contributes 1% of the company’s revenues, while all other regions combined contribute 2%.
As of the third quarter of fiscal 2013 (3QFY13), only a handful of Corning’s customers accounted for a significant portion of sales in each segment. For instance, four customers accounted for 97% of the total sales recorded by the Display Technologies segment, while three customers accounted for 87% of Environmental Technologies’ sales. Similarly, three customers accounted for 55% of the Specialty Material segment’s sales, and two customers accounted for 48% of the Life Sciences segment’s sales. This is not surprising, given that the company deals in highly specialized products.
Corning generates a significant portion of its revenues – nearly 36% – from display technologies. The segment has reported a year-over-year (YoY) slowdown, with the dollar value of sales declining 10% in 3QFY13. A supply glut in the LCD market resulted in pricing pressures, but also a resultant increase in demand from end users, which somewhat buoyed the segment’s declining revenues. Volumetric sales increased 24.6% YoY.
The company expected overall demand for LCD glass to increase in the mid-to-high single digits in 2013; however, a decline in the price charged per square meter, primarily because of the excess supply in the market, has been a major headwind for the company. The supply glut is an industry-wide problem, and the issue, combined with increased competition in the segment, can lead to a drastic reduction in the company’s revenues from display technologies going forward.
Earnings from Equity Affiliates
Apart from the decline in display technologies, Corning’s earnings from equity affiliates have also registered a fall due to the pressure to lower prices amid increasing competition.
Corning will take complete ownership of one of its major affiliates, Samsung Corning Precision, by January 2014. The transaction will enhance Corning’s ability to act independently: Samsung and other minority stakeholders will not have any board seats or access, which will be viewed favourably by Corning’s other clients, who happen to be Samsung’s direct competitors.
Life Sciences reported a 38.7% YoY increase in revenues in 3QFY13, while the Telecom segment reported 24.3% growth. However, the company’s Environmental segment weakened, with revenues falling 3.4% in the quarter.
Revenue growth in telecom products reflected an industry-wide trend, and it is expected that the Telecom segment will continue to grow moving forward as the telecom industry shifts from copper to optical fibre with the increasing demand for greater internet bandwidth.
The Speciality Materials segment has grown at a 5-year compound annual rate of 27%. 78% of the segment’s revenues are generated from sale of Gorilla Glass, which has been used to protect display screens of mobile devices. The demand for mobile devices will continue to grow through 2014, but excess inventory from the previous year will be a headwind for Corning, and strong sales growth can only be expected if supply-chain issues are rectified.
The company's third quarter earnings were in-line with the company’s previous forecasts, with core sales touching $2.1 billion – an increase of 10% YoY. Corning’s core earnings per share (EPS) also rose 18% YoY to $0.33 for the quarter.
The Display Technologies segment reported 7% growth, recording sales of $689 million. However, core earnings for the segment were down 9% due to a decline in earnings from the company’s equity affiliate, Samsung Corning Precision (SCP). Both Corning and SCP reported volumetric sales growth in the low teens.
The Telecommunication segment reported sales of $650 million, marking an increase of 24% YoY. The growth came on the back of increased demand for materials used by telecom networks, enterprises and wireless networks.
Specialty materials recorded a decline of 10% YoY, recording revenues of $326 million. The decline was attributable to supply-chain issues which led to the buildup of excess inventory in 4QFY12.
Environmental Technologies recorded sales of $225 million, marking a 3% decline YoY due to weaknesses in the European market.
Life Sciences revenues increased 39% over the comparable year-ago quarter, and the segment recorded revenues of $215 million following the acquisition of Discovery Labware.
The company expects LCD and glass sales to decline sequentially in 4QFY13 due to a seasonality effect which impacts the entire industry. The company is also going to reduce its inventory levels from the previous year, keeping it within 15-16 weeks, compared to 18 weeks’ worth held last year.
A fall in optical fiber sales volumes in North America and China is expected to add to the company’s woes and weigh significantly on revenues. Corning also expects a YoY decline in the Telecom segment’s revenues due to construction delays in Australia's National Broadband Program.
According to a NPD DisplaySearch research report issued in March 2013, LCD TVs accounted for 87% of total TV shipments in 2012. In 2012, shipments of LCDs had declined for the first time, and shipments were expected to experience a further deceleration in growth going forward.
According to the same research, an increase in demand for large-sized TV screens will be the driving force in sales of TFT LCD flat-panel-displays in the future.
Demand for LCD monitor panels 23” and larger is expected to increase from 45 million units in 2013 to 52 million in 2014, whereas the demand for mobile phone panels of 5” and larger is also expected to increase from 282 million units in 2013 to 448 million units in 2014. Based on these estimates, TFT LCD area demand will increase from 141 million square meters in 2013 to 154 million square meters in 2014, as per DisplaySearch. Increases in demand for mobiles and LCDs have traditionally been positively correlated with the demand for Corning’s Gorilla Glass, and recent trends can indicate strong upside for the company.
However, Apple’s (AAPL) recent investment in GT Advanced Technologies (GTAT), which is working on a material called Sapphire, is going to be a threat for the company. Device makers may want to switch to newer technology by using Sapphire glass instead of Gorilla Glass, if it is offered at competitive prices and offers added benefits. The product is still being developed, but will definitely be one to watch out for.
Stock Price Performance
Corning’s stock price has risen from $12.45 at the beginning of 2013 to around $18.20 as of now, having rallied nearly 41%. The strong upsurge in the share price is attributable to growing demand for Gorilla Glass with expansions in the smartphone and tablet market.
Valuation & Conclusions
Corning is currently heavily dependent on the LCD market, which is currently faced with a supply glut and resultant pricing pressures. However, changing customer preferences and increased interest in large-sized products has pushed the demand for larger LCD panels. The fall in revenues from declining prices has therefore been somewhat offset by rise in sales volumes, but we are not sure if this will hold true in the future as well. Given the company’s heavy reliance on its Display Technologies segment, there is a possibility that declining revenues in this category will significantly limit the company’s earnings going forward.
We also believe that Gorilla Glass, an important cash-cow for Corning, will face some serious competition from Sapphire glass if the new technology is offered at reasonable costs. But for now, we expect demand for Gorilla Glass to keep rising with the growth in smartphone and tablet shipments.
Corning is currently trading at a one-year forward price-to-earnings multiple of 12.4x, which is a 37% discount to its competitors. However, while Corning has potential to grow, there are uncertainties attached to its future prospects, and we advise investors to hold the stock and/or wait till a positive catalyst develops before buying the stock.