GLW - Corning Stock: Bullish Into Q2 Earnings

2023-07-12 11:22:09 ET

Summary

• We preview Corning Incorporated's Q2 earnings report expected in late July with a bullish outlook.
• A path for a rebound in growth and firming margins highlight an emerging financial turnaround.
• Corning stock is supported by solid fundamentals, and we see value in the 3.2% dividend yield.

Corning Incorporated ( GLW ) is recognized as a leader in materials sciences with an extensive portfolio of high-tech glass, fiber optics, and specialized ceramics. The core markets cover everything from industrial displays, consumer electronics, broadband communications, healthcare, and even automotive applications.

Shares have been volatile over the past year amid several headwinds between supply chain disruptions, inflationary cost pressures, and softer demand. That said, the setup now is for an improving outlook in what we believe may be the early stages of an emerging operational and financial turnaround.

Ahead of the upcoming Q2 earnings report ( expected on July 25), we see room to turn bullish on GLW, which maintains overall solid fundamentals while benefiting from several catalysts that can push shares higher. The combination of cost-saving efforts and new growth initiatives should work to push shares higher.

GLW Q2 Earnings Preview

The story with Corning has been its attempt at dealing with shifting macro conditions over the last several years culminating with a record 2021 during the early stages of the post-pandemic recovery. That momentum continued through the early part of last year, when management described an " outstanding start to 2022 ," which in turn has left a high benchmark with tough comparables for recent quarters.

By the measure, despite a decline in annual sales and earnings during the last reported quarter, the company has grown considerably and evolved to consolidate its market position compared to the pre-pandemic era.

Heading into the Q2 earnings report with a tentative release date of July 25th-27th, the expectation is for an improvement in sales, earnings, and cash flow. The sense here is that the operating environment is now normalizing.

Management is guiding for core sales between $3.4 billion and $3.6 billion, which would represent a modest sequential increase at the midpoint compared to the $3.4 billion result in Q1 . Similarly, the guidance range for EPS is between $0.42 and $0.49 and compares to $0.41 in Q1 . While the headline metrics are still down on a year-over-year basis, the big takeaway for us is that the trends are set to move in the right direction.

Some of the encouraging signs already this year include a bump in the gross margin, which has been consistent with easing inflationary cost pressures globally while Corning took the opportunity to push pricing higher.

There are a couple of key themes at play. First, while results were pressured in recent quarters from soft sales as customers drew down their inventory levels, a new rebuilding cycle should translate into a more dynamic top line.

Corning is also seeing a recovery in its flagship Display Technologies segment. With data from March, key customers among panel makers have been seen increasing utilization, which should continue through the second half of the year.

There is some anticipation that a "significant" increase in glass volume sales helps balance what are still softer trends in Optical Communications, Life Sciences, or Specialty Materials.

GLW Compelling Valuation

What we like about Corning is that it blurs the lines between an "industrial" name while also capturing trends in technology and broader cyclical dynamics. On this point, the backdrop is positive in our opinion, considering the momentum in technology where end-user customers are seeing a resurgence of growth and positive sentiment this year.

We won't call GLW a play on "artificial intelligence," or AI, but would say it has its hands in end-user applications considering next-generation devices incorporating displays and fiber optic connectivity. Similarly, exposure to high-growth markets like electric vehicles and even solar panels keeps the company highly relevant through the next decade.

Getting past 2023, the outlook is for stronger growth into 2024 amid what could be a more widespread macro recovery. The path for inflation to settle lower and credit conditions to stabilize can work as a tailwind for stronger earnings.

According to the consensus, GLW is expected to reach an EPS of $2.00 this year, which could climb by 22% in 2024 toward $2.44. We believe that the outlook implying a 1-year forward P/E of just 14x is highly attractive for a high-quality market leader. The bullish case for the stock is that there is an upside to these estimates.

What we find is that across several valuation multiples, GLW is currently trading below the historical average for the same metric. The stock's current enterprise value to forward EBITDA multiple at 9.1x suggests shares are undervalued relative to the 9.9x average over the past five years. The spread is even more compelling looking out towards 2024 and beyond, assuming growth and earnings can regain the upside trajectory.

GLW Is a Dividend Challenger

The other dynamic we can bring up here is GLW's attractive dividend yield of 3.2%. While not necessarily a high-yield income name, the payout stands out within the electronics component industry and is well above the broader tech sector average.

Notably, GLW presents a 13-year streak of consecutive annual dividend growth, unofficially placing Corning in the select group of "dividend challengers" among companies that have raised the dividend for at least 10 years.

More importantly, we view GLW's payout as well-supported by underlying cash flows and the company's overall solid fundamentals. That perspective is affirmed by Seeking Alpha's dividend scorecard , where GLW earns high marks across categories like "Dividend Safety" and "Dividend Consistency."

With the next distribution of $0.28 per share to be paid on September 28th already announced, we see room for a modest dividend hike in early 2024, maintaining the pattern of announcing an increase for the Q1 distribution.

Final Thoughts

There's a lot to like about Corning which could play out into a big winner going forward assuming the cards fall right. For the upcoming Q2 earnings report, the monitoring points include the evolution of the gross margin and cash flow trends as a measure of the health of the underlying business.

Taking a look at the stock price chart, the technical setup is interesting, with shares approaching what we view as a technical breakout. Trending above $35, it appears GLW is breaking above what had been a long-running downtrend going back to 2021.

A solid Q2 earnings report coupled with some positive guidance by management could drive a new wave of bullish momentum in the stock backed by a stronger outlook. Our initial price target is $45 representing a 22.5x multiple on the current 2023 consensus EPS. To the upside, revisions higher to EPS estimates for the second half of the year and into 2024 can push shares even higher.

In terms of risk, a scenario where macro conditions deteriorate would likely undermine recovery and force a reassessment of any bullish outlook. A selloff in shares below the low of last year around $29 would signal a more concerning development and also our stop level as a new long.

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