2023-03-09 04:48:21 ET
Summary
- Corning's price increases and operational streamlining could drive gross- and operating-margin improvement in 2023.
- Corning's optical-sales growth appears poised to fall short of the company's double-digit target in 2023 given the outlook for more cautious telecom and cloud spending.
- I keep a Hold rating on the stock with a December 2024 price target of $40 based on a ~16x P/E multiple on the consensus 2024 earnings estimate.
Thesis
Despite concerns about short-term issues related to slowing demand for key consumer products such as TVs and smartphones, I remain positive on Corning ( GLW ) due to expected growth in its Optical and polysilicon solutions segments, which should offset weaknesses in other areas. Additionally, pricing trends and a potential recovery in the impacted end-markets could boost earnings in 2023, especially in the second half of the year when Display and Smartphones are expected to rebound. In the longer term, I anticipate that Corning will meet its growth targets for revenue and earnings. I keep a Hold rating on the stock with a December 2024 price target of $40 on the stock based on a ~16x P/E multiple on the consensus 2024 earnings estimate for GLW.
Post Q4-2022 Outlook
Corning expects weaker first-quarter results due to the impact of COVID-related policy changes in China on key end-markets such as TV, smartphone, and automotive, as well as slower-than-expected recovery in its Optical segment due to delays in Telco projects. However, the company anticipates that the first quarter will be the weakest quarter and expects sequential revenue growth in the second quarter, with year-over-year revenue growth in the second half of the year. Corning is optimistic about a rebound in panel demand, despite low TV retail demand, due to low inventory levels. The company has taken measures to prepare for the recovery, including price increases, productivity adjustments, and inventory normalization, which should enable Corning to generate better margins and cash flow. The company predicts a sequential margin increase of 100-200 bps in the first quarter, despite a greater-than-typical decline in revenue due to seasonality. However, the timing and magnitude of the rebound remains uncertain.
China Recovery on the Cards
Corning noted the recent COVID situation in China has led to demand headwinds driving lower consumer spending and lower workforce availability, which is impacting Display, Environmental and Specialty businesses. For example, Panel maker utilization improved in the months of October and November before plateauing in December and moderating in January, and is now below the already tempered levels of demand. While Corning expects an eventual rebound in China, visibility as to the timing and magnitude remains limited. That said, Corning did suggest it expects sequential revenue growth in 2Q23 and for year-over-year growth in 2H23, suggesting less material headwinds relative to 1Q23.
Slow 2023 Start Could Yield Better 2H
The course of Corning's 2023 sales will probably be determined by the strength of a 2H rebound from what may be a challenging 1H, with makers of TV- and smartphone-display panels paring production, and telecom and cloud providers slowing investments in optical. Supportive pricing may continue to cushion Corning's display business amid weak glass volume. Display growth is likely to return in 2H as panel makers ramp up to meet seasonal demand. An increase in average TV- screen sizes could also aid Corning, allowing it to gain share as more production shifts to Gen 10 display plants.
Optical Gains Could Fade Temporarily
Corning's optical-sales growth appears poised to fall short of the company's double-digit target in 2023 given the outlook for more cautious telecom and cloud spending. A strong 1Q optical rebound from disappointing 4Q results, needed to stay on course to meet the target, looks unlikely. With the US 5G network coverage rollout largely complete, I expect telecom providers to slow the pace of optical-fiber investments, which may be compounded by the impacts from softer hyperscale-cloud spending plans.
Similar to the displays business, price hikes in the optical segment should help mitigate slower growth. Despite prospects for a 1H sales decline, we believe the focus will shift to network density, which should put Corning back on double-digit growth track in 2H and through 2024-25.
Pricing, Volume Could Aid Margin
Corning's price increases and operational streamlining could drive gross- and operating-margin improvement in 2023 following multi-quarter lows in 2H in nearly all of its business segments. The weakness was most pronounced in display technologies, optical, and specialty materials. Corning has some gross-margin support with glass production at or near bottom in 4Q22-1Q. The company has leverage to pass on costs to TV- and smartphone-panel makers and fiber-optics customers, which should aid gross margin expansion as volumes improve, especially in 2H. Paired with modest expense cuts, that could keep 2023 operating margin unchanged.
Valuation
My December 2024 price target of $40 is based on a ~16x P/E multiple on the consensus 2024 earnings estimate for GLW. The ~16x P/E multiple is at a discount to the multiple at which industrial technology peers trade and is in-line with GLW's historical NTM multiple, given downside risks stemming from consumer market exposure in a tough macro environment in 2023.
Risks To Downside
The majority of the current display market relies on LCD displays, with more costly OLED displays being the second most popular choice. A shift from current display technologies to a new form that uses less glass could have negative consequences for the company. Corning's Environment Technologies unit produces substrates used in emission-reducing catalytic converters for internal combustion engine vehicles. If electric vehicles become more widely adopted at a faster pace than anticipated, the Environment Technologies segment may experience lower earnings than expected.
Final Thoughts
Corning's display glass price stability and price hikes could help a gross margin rebound and preserve profits tempered by top-line growth as consumer electronics demand is likely to remain stubbornly weak over the next several quarters. While the optical segment remains Corning's key growth engine, its 1Q outlook suggests to us that its double-digit growth target may be difficult to achieve in 2023. However, price increases and operational streamlining would continue to drive gross- and operating-margin improvement in 2023, in my view, following multi-quarter lows in 2H in nearly all of its business segments. I keep a Hold rating on the stock with a December 2024 price target of $40 based on a ~16x P/E multiple on the consensus 2024 earnings estimate.
For further details see:
Corning: Rebound Likely In The Second Half Of 2023