EUR 850.00 For Business Accounts Only

Morningstar | Specialty Glass Helps Corning Deliver Another Solid Quarter; Maintaining $31 FVE

Corning reported solid third-quarter results, with earnings and revenue largely in line with our forecast even though sales from specialty materials were pulled forward a quarter. We are impressed by management’s ability to execute effectively across its end markets, enabling it to harness the broad secular tailwinds driving efficiency and connectivity. We are maintaining our narrow moat rating and $31 fair value estimate and note that shares are currently fully valued.

Corning reported $3 billion in revenue for the quarter, up 15% year over year, with strong growth from specialty materials specifically. The segment delivered 34% sequential growth with a year over year increase of 23% as a result of the new Gorilla Glass selling into smartphones. Optical sales were similarly impressive, growing 22% year-over-year. While carrier sales still account for the roughly two thirds of segment revenue, the major growth has come from enterprise sales. Sales into data centers grew by 43% versus the prior-year period, accounting for over 10% of total revenue, and we believe management remains on track to deliver $5 billion in segment sales by 2020.

Environmental technologies continued to deliver as OEM’s ramp to meet pending emissions regulations in Europe. Sales for the segment increased by 20% year over year, with nearly 30% growth from diesel product sales. While we believe diesel-related sales will taper off longer term, we believe the increasing emissions standards are a more sustainable tailwind for Corning’s gas products. Finally, sales in the display segment grew 9% sequentially even though pricing declines reached mid-single digits. Most importantly, the firm has improved segment efficiency, with adjusted net income growing at nearly 14% sequentially to $218 million. The investments in Gen 10.5 production are yielding positive results and buoy our forecast of margins returning to the high 20s on a long-term basis.

Management updated its sales guidance for 2018 with total revenue now expected to exceed $11.3 billion. Optical communications revenue is expected to grow a by low-single-digit percentage sequentially, which would represent year-over-year growth in the low 20% range due to strong organic growth and Corning’s acquisition of 3M’s communication products in June. Specialty glass sales are expected to be flat year over year, as large customers pulled forward sales into the third quarter, disrupting the normal seasonality for sequential growth in the fourth quarter. However, management did indicate that specialty products for automotive interiors are on track for production in 2019, highlighting agreements with Porsche and Harley Davidson amid more than 50 product platforms for its lightweight, durable specialty products. While we believe wearables and other consumer products will remain the primary venue for the firm’s specialty glass (which accounts for roughly 12% of total revenue), we are encouraged by the firm’s continuous ability to leverage its existing technology into other markets.