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Corning: Valuation and Prospect Analysis

June 28, 2014 | About:
Vinay Singh

Vinay Singh

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Corning (GLW)'s telecommunications business contributes roughly 24% to overall revenue. I believe its stock price has a strong upside on the grounds of rising broadband demand from emerging countries and growing data traffic from the developed regions.

Telecommunication sales grew from $1.7 billion during 2010 to $2.1 billion by 2012, representing a 12% compounded annual growth rate for the period. Considering the developing nations still have a massive potential for Internet penetration, I expect the sales from the telecommunications business to be a key driver for Corning’s business going forward.

Valuation Summary

Corning generates the largest percentage of its revenue, 33%, from its display technologies. This is followed by telecommunications at 24% and specialty materials at 15%.

A Samsung-Corning joint venture generates 7.5% of sales, and has a significant impact on Corning’s stock price despite the fact that its contribution to the overall revenues is far less than other segments.

Corning has a market cap of $19.1 billion and currently shares are trading at 90% of the stock's 52-week high. Corning’s global market share in the fiber optics business fell sharply when it touched a low of 46% during 2010; however, since then the company has recovered, the market share has improved to 54%.

With the developing regions still heavily under-penetrated, there may be a huge upside in the stock price, as demand for broadband is only expected to grow.

Corning Samsung Precession

Samsung and Corning have a 50-50 joint venture, a partnership that manufactures glass substrates for LCDs used mainly for computer notebooks and LCD televisions. The equity income at Samsung Corning Precision grew steadily from 2007 to 2010; however, it has fallen sharply since 2010, primarily due to falling LCD prices and increased competition.

According to a valuation offered by Trefis, Samsung Corning Precision is the most valuable division within the company, and hence asserts maximum influence on its stock price. Currently, the division constitutes roughly 36% of Corning’s overall share value.

Growing Fiber Optic Demand

Corning’s technology resources and enormous manufacturing facilities in the fiber-optic cables' field should enable it to serve rapidly rising demand. Nowadays, fiber optics is the most preferred mode for data transfer, primarily to avoid data loss. Therefore, the growing Internet users from emerging nations and the ever-rising Internet traffic from the developed regions are now compelling several telecom companies into only laying fiber optic cables.

Potential Growth from the Developing Countries

It must be noted, according to the international telecommunications union, only 13% of the total population from developing regions had access to normal broadband or mobile Internet during 2011. This presents a huge growth opportunity relative to developed regions, which are nearing saturation with 80% of the total population already having access to either fixed broadband or mobile Internet.

As the Internet penetration increases in the developing regions, the fiber-optic cable network will also grow bigger. Some of the key markets for Corning are China, India and Brazil.

China has approximately 126 million Internet users, which translates into the highest number of Internet connections globally. However, the market remains heavily under-penetrated with nearly 90% of its population still not subscribed to broadband.

Relative to China, developed regions, such as Germany (32%), UK (31%) and the U.S. (28%) enjoy much higher rates in Internet subscriptions. Eyeing such a massive potential for growth has led Corning into setting up manufacturing facilities both in India and China.

In addition, to address the Brazilian market, Corning recently announced the acquisition of a local telecom connectivity provider called Bargoa S.A. Hence, Corning’s sales from the telecommunications division should continue to grow mainly driven by the rapid increase in demand of fiber optics from the emerging nations. Moreover, manufacturing facilities located in India and China should facilitate the company duly in addressing the escalating demand.

Competitive Landscape

In the domain of telecom hardware, Corning also competes with 3M. 3M’s electrical and communication’s division offers a large variety of products, such as computer chips, touch screens and fiber-optic solutions.

Although, it must be noted the company generates its maximum revenue through industrial adhesives and chemicals. The electrical communication division is a small part of the company with only 11% contribution to the overall revenue; nonetheless, 2012 revenue from this division stood at $3.3 billion.

Similar to Corning, 3M’s fiber optic business is also expected to grow rapidly underpinned by increasing demand from the developing region. 3M's current market cap stands at $72 billion and the share price is trading at 98.5% of its 52-week high.

What to Expect

Corning is a pioneer in fiber-optic manufacturing and possesses more than 50% market share globally. The telecom division generated a total of $2.1 billion in revenue during the fiscal year 2012. Sales of fiber optics solutions contributed roughly $1.1 billion to overall telecom revenue.

Growing demand for broadband from emerging economies is expected to increase the revenue share of fiber optics going forward.

I believe the Samsung Corning Precision division may under-perform with increasing competition in the LCD market and constant innovation that eventually leads to lower prices. Nevertheless, growth in the fiber optics division looks highly certain, which may result in the telecom division becoming the highest contributing revenue stream for Corning going forward.


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