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Morningstar | Corning’s Solid Performance Doesn’t Crack in 2Q Results; Maintaining $30 FVE

Corning brought in strong results in the second quarter, with year-over-year sales growth in most segments, specialty materials performing better than expected, and the company raising its full-year revenue guidance. We’re encouraged by Corning’s results even before seeing major effects of growth drivers such as gasoline particulates, more glass orders per smartphone, revenue from the 3M communication markets division acquisition ($200 million estimated for fiscal 2018), and demand for Valor glass. Considering Corning’s continuing innovation in somewhat mature markets, we believe the narrow-moat company will continue to drive shareholder value and are thus maintaining our $30 fair value estimate. With shares up as much as 11% on the strong results, we view shares as slightly overvalued.

Corning reported $2.7 billion in revenue in the June quarter, up 10% year over year. Optical communications sales were up by 16% year over year, aided by data center and carrier customer growth, and should now rise a high-teens percentage, up from prior 10% guidance. Environmental technologies increased the most year over year, by 21%, due to strength in auto, particularly premium products. Consequently, Corning raised its full-year sales guidance to be up by a midteens percentage for the segment, also up from 10% previously. Life sciences sales were up 11% year over year as Corning outpaced market growth. Sales were up 2% year over year in specialty materials due to Gorilla Glass shipments. Favorable pricing persisted for display technologies, which increased sales moderately by 0.4% year over year with robust TV demand. Management expects further pricing decreases to slow as competitors face profitability concerns.

Corning’s profitability remained fairly constant, with gross margin coming in at 41%, up 100 basis points sequentially but down 100 basis points year over year. We believe display technologies will continue to be a leading force in Corning’s profitability.

Management expanded its sales guidance for 2018 to $11.3 billion, up from prior guidance of $11 billion. We now think the firm's revised guidance will be achievable. We look to auto to continue to be a significant growth driver as emissions regulations in Europe and China are enforced, increasing demand for gasoline particulate filters. And, despite a maturing smartphone market, we believe Corning has substantial opportunity in smartphones as Gorilla Glass 6 comes to market and glass encompasses more surface area of the average smartphone due to aesthetics but also better capabilities – such as wireless charging. Additionally, we are encouraged by further developments in wearables. We expect demand for Valor glass and sales from the newly acquired 3M communication markets division to be fellow contributors to these growth opportunities.