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Strong Demand for Gorilla Glass Makes Corning a Buy

July 24, 2014 | About:
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kcpl

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Corning (GLW) recently released mixed first-quarter results. It posted robust sales and earnings numbers, but failed to impress Wall Street analysts. Still, Corning is confident about its operational moves, and is optimistic of delivering better results in the future. Let us take a look at whether Corning is suffering from just a seasonal weakness or if there is something grave to worry about?

A look at the performance

Corning’s financial were impressive in some areas. Since Corning is a major supplier to Apple, this has helped the company establish a brand image in the market. As a result, its sales grew 32% to $2.4 billion. In the display technology segment, Corning is working with some of the known names such as Sony, Lenovo and LG, supplying display panels.

As a result, sales in this segment soared by an impressive 58%. The optical communications division also saw 26% growth, which was driven by continued strength in carrier network sales. Looking at the other side of the coin, Corning's net income fell to $301 million from $494 million.

The way ahead

Corning’s financials might have upset investors on some grounds, but management is confident about its long-term performance. Corning is focused on sales growth in optical communications, especially environmental life sciences, as these have delivered vast improvements in their end markets.

Corning relies for much of its sales on LCD-TV glass. In the past, the profit margin has been impacted by massive price declines in this segment. However, Corning is expecting the price declines to be moderate in the future. Corning is also expecting growth in sales volumes for LCD glass in the second quarter, as a result of growing demand for its Gorilla Glass in smartphones, and the increasing consumer trend of buying larger televisions.

Another interesting fact in this segment is that Corning is seeing an increase in demand for ultra high-definition TVs, but the company thinks that these will gain traction in the market in late 2014. However, Corning is confident of the fact that it will be a major growth driver for the company in the days to come.

Benefits of integration

Moving forward, Corning is enjoying the benefits of synergies that it had anticipated with the consolidation of Precision Materials in the past. Corning has completed the acquisition of Samsung Corning Precision Materials, which was a joint venture with Samsung Display. This venture makes LCD glass in Korea.

However, Corning is worried about currency fluctuations. The fluctuating yen against the dollar is a matter of worry for the company, as it can hurt its margins badly and can scare investors away. However, to get over this, Corning is undertaking two strategies. First, Corning is planning to hedge its risk, which will reduce its exposure to foreign exchange risk. Second, Corning has entered a series of average rate forwards in the first quarter, which will partially hedge the impact of the Japanese yen on its projected 2015, 2016, and 2017 net income.

Moving on, Corning is expecting stabilization in the polysilicon market. However, the company does not expect polysilicon sales to pick up until the fourth quarter since customers will have to fill their annual contractual obligations by that time. Further, with new launches in the mobile segment, Corning expects growth in the sales volume of Gorilla Glass.

Conclusion

With trailing P/E of 17.74, Corning looks like a reasonable purchase. Its forward P/E of 12.92 indicates that the company has more room to improve in the future. It is anticipating strong demand for LCD TVs in the future, and the launch of new products in the mobile segment will drive its performance as well.


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