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Morningstar | Secular Tailwinds Facilitate Continued Execution at Corning; Shares Fairly Valued

Corning delivered a solid start to fiscal 2019, with first-quarter results meeting our expectations as well as consensus on the top and bottom lines. Strength was broad-based across the various functional segments, though relatively soft guidance for the specialty materials segment tempered the market’s reaction to the results. We continue to see secular trends such as data proliferation and edge computing driving demand for Corning’s portfolio, and believe the firm’s scale and unique manufacturing processes still represent structural advantages underpinning our narrow moat rating. We will maintain our $33 per share fair value estimate, and while the stock was down as much as 9% after the print, we do not see an appropriate margin of safety at current levels.

Reported "core" revenue (adjusted for currency hedges) was $2.9 billion, up 13% from the year-ago quarter. Each operating segment demonstrated year-over-year sales growth, with particular strength from display technologies, optical communications, and specialty materials, up 10%, 20% and 11%, respectively. Display technologies is benefiting from the most favorable glass pricing environment in over a decade, optical communications remains on track to exceed $5 billion in sales in 2020, and the firm’s Gorilla Glass technology (situated within specialty materials) continues to gain traction in the market.

GAAP gross margins widened to 39% versus 38% in the first quarter of last year.  This line will experience short-term fits and starts as Corning expands capacity and ramps production in areas like glass, in conjunction with customer BOE, and gas particulate filters. Some may question capacity expansion within such an uncertain demand environment (particularly in China). However, we believe the confluence of secular trends driving demand for the firm’s products, and the concentrated nature of the markets within which it competes, will facilitate future growth opportunities that justify these investments.