2023-04-27 10:30:59 ET
Summary
- Display division trend is improving. This is also well supported by government funds.
- IRA upside in Hemlock division. And more manufacturing capacity in the Optical segment.
- A challenging year with upside for 2024+. Corning's valuation is compelling, and we reiterated our buy rating.
Recently, Corning Inc (GLW) released its three-month figures. Here at the Lab, we were not particularly lucky with Corning's target price change, but we continue to believe that the company offers an interesting entry point for 2024 onward. Our internal team has covered the stock twice already this year and we suggest that our followers check up on our previous analysis so that they are well informed of the narrative up to now:
- Corning: Now Is A Buy
- Corning: Time To Increase Your Position
After our deep-dive, we are even more confident in Corning's earnings estimates for the 2023 second half and 2024. We believe the company will prosper from:
- Higher optical demand from higher US Government funding;
- Improving display trends as panel inventories bottom;
- Hemlock's positive growth trajectory as US domestic production of polysilicon becomes increasingly valuable;
- EVs upside.
In addition, the company is now reverting raw material inflationary pressure with price increases which are supporting for Corning's profitability. Management is also focused on expanding its " More Corning " strategy, and here at the Lab, we believe that solar demand and EVs will be strategic priorities for the company's future earnings.
Starting with our point 1), Corning management remains very positive in the Optical demand that will be driven by fiber cable adoption. During the 2022 last quarter, the company introduced its largest price increase across the Optical division. This will significantly contribute to the company's profit for the year. For data centers, management expects a flat demand, while for the data center solutions called "plug and play", there is potential for a double demand. As mentioned in the recent company release, EDGE Distribution System is faster, more sustainable, and customizable. In addition, we expect new government support. While it takes time to deploy the government funds, Corning already increased its manufacturing capacity both in the US (Arizona) as well as in the EU ( Poland ). This should help the company meet the upcoming demand. Aside from the information already priced in, we should also take into consideration the Rural Development Opportunity Fund which sets aside $9.2 billion to telecommunication providers for the next 10 years to finance the necessary networks in rural areas.
Analyzing the Display Technologies division (point 2), the segment remains under pressure due to Chinese weakness. In Q4, we already incorporated a lower utilization rate in Corning's facility, but this demand has reverted in recent weeks. In the Q1 call, management reported that consumer demand is still behind the pre-COVID-19 level but on a positive note, panel inventories significantly declined. The division beats Wall Street estimates by 5% thanks to improved market conditions in China. The company's gross margin was at 35.2% thanks to higher prices, while cost optimization led to a core operating margin of 15.5% (53 basis points above consensus). Here at the Lab, we are also positive for the following reasons: 1) competitors are trying to maintain profitability and Corning has cost-competitive advantages, and 2) continuous shift to larger screen sizes (the company is the market leader in 50"+ screens). All in all, our internal team forecast a 9% decline in revenue for 2023 and a return to growth in 2024 (+8%).
We are also very optimistic about growth opportunities within Hemlock as the company is the only US domestic player in polysilicon. Currently, 90% of production is in China, and we expect that the company will gain new demand in the US and the EU. Following the majority stake acquisition in late 2020, Hemlock is twice as big with its division cash flow that already fully covered Corning's initial investment. We will not be surprised to see better sales thanks to the IRA benefit , which currently incorporated significant tax credits for solar investments.
Finally, the auto segment is very attractive with an estimate of $100 product value per new car. Corning expanded its product offering with gas filters in Europe and is also launching in the US. We will have more visibility in the upcoming months but we believe that the US will adopt similar regulations. In addition, the company already leads the market with interior displays thanks to the ColdForm technology; however, the exterior glass market needs some more leverage thanks to its branded glass called Gorilla.
Source: Corning Q1 results presentation
Q1 and Corning margin opportunity
As already mentioned, Corning delivered better than expected Q1 results, with top-line sales at $3.37 billion which were above consensus estimates set at $3.35 billion. Core EPS reached $0.41, and again was a beat vs Wall Street expectation set at $0.39. The company's gross margin declined >500 basis points from pre-COVID-19 levels (exited 2022 at 36.0%). In 2022, this was the result of inflation and slower demand. The company is now fully focused on 1) price increases, 2) lower Corning's cost basis, and, 3) a Chinese recovery. Looking at the press release, despite lower sales, the company's core gross margin already sequentially increased to 35.2%.
Corning Q1 Financials in a Snap
Conclusion and valuation
Before going to the conclusion, it is important to recap the latest news. Corning management highlighted the possibility to have double-digit ROIC on new investments (despite a below-40% gross margin). This will be supported by new business areas such as the above-mentioned auto and polysilicon upside. CAPEX will be slightly lower than in 2022. The company recently increased its quarterly DPS by 3.7% and since 2021, it bought back 5% of outstanding shares. Looking ahead, Corning continues to see an improvement in Q2 in Display Technologies and forecast sales between $3.4 billion and $3.6 billion with earnings per share between $0.42 and $0.49. Here at the Lab, we are confident that these performances will be worth some re-rating from the Wall Street investor community. Therefore, here at the Lab, we reiterated our outperform rating with a $40 target price valuation which is based on 15x Mare Evidence Lab's 2024 EPS. The company's main risks are included in our initiation of coverage.
For further details see:
Corning: Expecting Improvement In Q2