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Morningstar | Corning Capitalizes on Optical Demand; Raising FVE to $33

Narrow-moat Corning reported strong fourth-quarter results, with revenue exceeding our expectations and adjusted earnings per share in line with our forecast. Optical communications and display technologies drove sequential revenue growth during the quarter, with a favorable pricing environment and capacity optimization in the latter leading to solid performance. We believe Corning has performed impressively over the past 12 months amid a softening smartphone market and geopolitical headwinds and we reiterate our long-term view that the firm’s glass and ceramic products will continue to benefit from increasing connectivity. After updating our forecast for Corning’s 2019 outlook and rolling our model forward, we are raising our fair value estimate to $33 from $31. Shares jumped on the firm’s positive news, after weeks of trading at a slight discount to our previous fair value estimate. Despite our fair value increase, we recommend investors wait for a margin of safety before investing.

Revenue in the fourth quarter was up 15% year over year (1% sequentially) to $3.04 billion, while adjusted earnings per share increased by 28% over the same period to $0.59. The strong year-over-year revenue growth was predominantly a result of the optical communications segment, which grew by 26% due to solid organic demand and contributions from 3M’s optical business, which was added midway through the year. Optical sales into data centers was especially strong, growing 60% year over year and 7% sequentially, thanks to demand for Corning’s high-density fiber products. These products, and Corning’s ability to develop parts for bespoke architectures, enable public and large private clouds to take on increased computational loads and to do so with far greater throughput across the scale of a data center versus copper cabling. While margins for the acquired 3M unit are not currently accretive to earnings, management expects that to improve in 2019.

Display technologies showed further signs of stabilizing demand for glass panels, with the segment growing 15% year over year (after a prior restatement of 2017 numbers) and approximately 6% sequentially. Management noted that the current pricing environment is the best seen for display glass in a decade and expect the favorable conditions to continue in 2019. Finally, the other major revenue driver was environmental technologies, which grew 10% year over year. This represented a slight decline sequentially, perhaps unsurprising due to the impact of regulation implementation on automotive production in Europe. That said, this same regulation, and those currently pending in China, has increased demand for Corning’s gas particulate filters with revenue for the products expected to grow from $50 million in 2018 to $150 million in 2019.

Management’s guidance for the first quarter of 2019 implies revenue growth in the mid- to high single digits year over year, with strong demand continuing for Corning’s optical communications products. Gross margins are expected to expand slightly in the first quarter, while operating expenses should trend lower and continue to improve throughout the year.