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Here's Why Investors Should Remain Cautious While Investing in Corning

June 23, 2014 | About:
jaggom

jaggom

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Corning (GLW) has performed quite well this year with its earnings ahead of the Street expectations. In fact, its earnings were better than the consensus estimate for all the four quarters. This reflects in its stock which has risen around 20% this year. But, the Gorilla glass maker saw a decline in its revenue by around 9% in the fourth quarter.

The company has been performing quite well for some time, but it will not have an easy road ahead as it has to face tough competition from GT Advanced Technologies, which makes sapphire display. It is believed that Apple will use sapphire display in its next iPhone. If so is the case then it is a matter of serious concern for Corning.

Recent news regarding sapphire

Recently, Apple has applied for a patent regarding oleophobic coating on sapphire. According to a report from AppleInsider,

“Specifically, the filing describes in detail the methods by which an oleophobic, or oil-repelling, coating can be applied to a sapphire slab prior to installation in a mobile device. Oleophobic coatings were first used by Apple with the iPhone 3GS in an attempt to counter the buildup of oil."

Apple notes the end result of this sapphire-transitional layer-surface layer sandwich is a largely continuous and uniform structure that retains the benefits of sapphire's hardness, while allowing for the operable application of an oleophobic coating.

In addition, Apple is also planning to expand its Arizona sapphire plant to boost its output in collaboration with GT. According to KGI securities analyst Ming Chi-Kuo, Apple could equip its high-end iPhones, such as the expected 64GB 5.5" iPhone 6, with sapphire display. Since the demand for larger-screened phones is huge, especially in markets such as China, Apple could see strong sales of the iPhone. And there is a possibility that Corning may lose this deal to GT as the later seems to be in a better position to benefit from this technology.

Corning's moves

However, Corning is trying to offset this negative effect by focusing on its other business segments. Corning has closed a deal with Samsung for the full ownership of its equity venture SCP. Corning will now get various strategic and financial benefits that will strengthen its LCD business, broaden its relationship with Samsung, and provide outstanding returns to shareholders.

In addition, we can also expect strength in the LCD glass business on account of good retail demand for larger televisions going forward. Corning has also moved into providing optical solutions, which include hardware and equipment. Today, it has become an industry-wide provider of optical solutions across the broader communications industry. In fact, its fourth quarter sales were up 12% to $605 million, which was better than expected. The improvement in optical communications income was driven by additional sales volume and manufacturing efficiencies.

However, Corning is under pressure due to lower than expected volumes of Gorilla Glass. Also, the increased sales of optical fiber were in lower margin products. Increased costs in air freight have also decreased the efficiency.

Although Corning expects demand for its glass to remain strong this year on account of higher television sales, the same cannot be said about pricing. According to a report in Bloomberg,

“LCD prices will drop more than in previous periods, the Corning, New York-based company said today in a statement. The decrease will be compounded by the unit’s traditional first-quarter dip in volume from the previous three-month period, the company said. The display unit’s sales dropped 5 percent in the fourth quarter from a year earlier, excluding currency changes and other items.”

Conclusion

This will arrest Corning’s growth, which has been stunted over the past five years, growing at a CAGR of just 3.39%. Although it is trying hard to improve its numbers, but still, it will be a wait and watch situation. It will be prudent for investors to wait on the sidelines and watch Corning’s performance.


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