2023-03-08 05:42:39 ET
Summary
- Recovery is pushed to the 2023 second half; however, the long-term opportunities remain intact.
- Panel price increases will support Corning's profitability.
- Corning increased its quarterly DPS by 3.7%. Our buy rating is then confirmed.
We just concluded the Morgan Stanley Technology, Media, and Telecom Conference. Corning (GLW) participated with Edward Schlesinger, Executive VP & CFO, and so today we are taking the time to update our readers on the latest highlights. In detail, the manager emphasizes that:
- Half of the Corning product portfolio is currently experiencing low cyclical demand, while the other 50% is in " pretty good " shape; however, not in peak demand;
- Corning's strategy aims to identify its best existing assets to lower variable costs and optimize technology adoption curves;
- The company is cognizant of lower market growth rates and is focusing on client relationships. In mind time, 2023 will be a key year for reducing inventory and evaluating overhead. In line with point 2), this will include headcounts and facility footprint. As a reminder, in 2022, the company already delivered progress on manufacturing efficiencies so in 2023, we should see some tangible margin improvements;
- Corning is also set to take advantage of quantum computing and communications;
- On the margin, Corning declared that will increase prices across its portfolio to contrast raw material inflationary pressure. Display Technologies and Specialty Materials divisions are the highest gross margin contributors and as demand recovers, these will support Corning's profit expansion;
- Here at the Lab, in 2023, we see an upward bias for Display Technologies and Optical Communications.
Thanks to the conference, we are even more confident in Corning's future. Looking at the company division, we report the following:
- In the Display segment, the company will benefit from the higher average screen size and its Gen 10.5 manufacturing leadership is perfect for >65" TVs;
- In the Optical Communications division, there is a pause in demand, but the manager expects a " tremendous activit y" for the next two years;
- Hemlock almost doubled its size versus Corning's acquisition date back in September 2020. The division payback was only 1.5 years, and we expect a strong 2023 thanks to solar panel demand (as well as solid growth in semis);
- In the Specialty Materials segment, we saw a good pickup in sales of camera lens covers, and Corning is growing in niche markets thanks to its technology advancements which offer more value to clients.
IRA - Corning solar opportunity
In 2022, we initiated Corning with a neutral rating , and then we decided to overweight the company with a buy and a target price of $40 per share. Our thesis was supported by 1) the new strategic plan called " More Corning ", 2) a better product MIX development, and 3) Corning's ability to increase market share penetration in declining markets (for instance the smartphone one). Aside from a discounted valuation vs its historical average, our buy was also based on macro takeaways: 1) US Government funding in Optical Communications coupled also with the US Affordable Connectivity Program , 2) IRA support towards solar-based internal production, and 3) the Chinese reopening.
When we increased our rating target, we thought that China reopening will likely benefit Corning's top-line sales. And we still believe so; however, there was some disappointment at Wall Street on the quarter's lower production rate. We should recall that Chinese December production was still impacted by COVID-19 restrictions and this will still affect Corning's sales range for Q1 2023.
Conclusion and Valuation
Looking at the latest quarterly update, the company delivered revenue of $3.63 billion, which was above our internal estimate; however, the gross margin was impacted by a loss of leverage in the Display segment and was challenged by absenteeism and higher inflation. Non-GAAP EPS reached $0.47 and mainly benefit from lower corporate tax. As mentioned during the Morgan Stanley panel, the company's main focus is to return to pre-COVID-19 level profitability thanks to price increases, restructuring in progress, and inventory reduction. Due to the ongoing disruptions in China, the company is delaying the recovery in the 2023 second half and is still targeting a return to $2+/share in earnings, while the Q1 2023 implied a run rate of approximately $1.55. Corning also recently increased its quarterly DPS to $0.28 from $0.27. Here at the Lab, we still expect several positive catalysts in 2023, and we decided to reaffirm our previous valuation with no model change in our approach. Corning's main risks are included in our initiation of coverage .
For further details see:
Corning: Time To Increase Your Position