Corning (GLW, Financial) reported 16% sales growth in the first quarter. The New York-based 166-year-old electronic components maker reported growth to $2.38 billion and turned profitable with $86 million –Â a 3.6% margin –Â compared to $368 million losses in first-quarter 2016.
As observed, Corning recorded much higher "translated earnings contract loss, net"* for the period amounting to $857 million compared to $438 million in the year-earlier quarter, which resulted in lower profits.
*10-Q: "Translated earnings contract loss, net" is the impact of foreign currency hedges which hedge our translation exposure arising from movements in the Japanese yen, South Korean won, euro, New Taiwan dollar and Chinese yuan against the U.S. dollar and its impact on Corning’s net earnings.
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“We are very pleased with the excellent performance and growth across all of our businesses this quarter.
“The strategic and financial benefits of Corning’s cohesive portfolio are becoming even more apparent. We are on track to deliver our 2017 objectives and overall Framework goals. Looking into the second quarter, we expect our momentum to be further demonstrated with year-over-year sales and EPS growth.” – Wendell P. Weeks, chairman, CEO and president
Total returns
In the past year alone, Corning delivered 57.47% total gains for its shareholders compared to the Standard & Poor's 500’s 18.24% (Morningstar data). In the past five years, the company delivered 17.2% vs. the index’s 13.8%.
Valuations
Corning is  undervalued in terms of market valuations to earnings (P/E) ratio with 7.95 times vs. the industry median of 20.8 times, a price-book (P/B) value of 1.7 times – same as industry median – and price-sales (P/S) ratio of 3.2 times vs. the industry median of 1.1 times.
Corning also had trailing dividend yield of 1.94% with 15% payout ratio.
The company also had forward sales and earnings multiple of 2.6 times and 16.5 times when using average analysts expectation.
Corning
According to filings, Corning traces its origins to a glass business established in 1851. For more than 165 years, Corning has applied its unparalleled expertise in specialty glass, ceramics and optical physics to develop products that have created new industries and transformed people's lives.
In 2016, 55.2% of total Corning sales were derived from Asia Pacific, 31.5% from North America, 10.4% from Europe and the remaining from other countries.
Corning operates in five reportable segments: Display Technologies, Optical Communications, Environmental Technologies, Specialty Materials and Life Sciences.
Display Technologies
This division manufactures glass substrates primarily for flat panel liquid crystal displays. In the first quarter, sales in Display Technologies grew 4.4% to $736 million –Â 31% of total unadjusted sales –Â and had a 33.8% profit margin (most profitable in all segments) vs. 29.6% in the year-earlier quarter.
In addition, Corning anticipates sequential LCD glass price declines will be substantially less in the coming second quarter with full-year 2017 declines expected to be about 10%, or possibly a lower rate.
Optical Communications
This unit manufactures carrier and enterprise network components for the telecommunications industry. In the first quarter, sales in Optical Communications grew 34.3% to $818 million or 34% (largest among all segments) of total unadjusted sales and had a 10% profit margin vs. 2.8% in first-quarter 2016.
According to Corning, sales improved due to higher sales of carrier and enterprise network products, combined with the absence of production issues related to the implementation of new manufacturing software in the first quarter of 2016.
In the second quarter, sales in the Optical division are expected to grow slower than the first quarter and be up approximately 10% year over year.
Environmental Technologies
This segment manufactures ceramic substrates and filters for automotive and diesel applications. In the first quarter, sales in Environmental division grew 4.2% to $275 million or 12% of total unadjusted sales and had 11.3% profit margin vs. 12.9% in first-quarter 2016.
Further, segment sales are expected to be consistent with second-quarter 2016 for second-quarter 2017.
Specialty Materials
This unit manufactures products that provide more than 150 material formulations for glass, glass ceramics and fluoride crystals to meet demand for unique customer needs. In the first quarter, sales in the division grew an impressive 32.2% to $300 million or 13% of total unadjusted sales and had 16% in margin vs. 11.5% in first-quarter 2016.
According to Corning, sales were driven by strong growth in sales of the company’s Gorilla Glass products, combined with an increase in advanced optics products.
For the second quarter, the sales growth rate is expected to be in the high teens (slower than in the first quarter) year over year.
Life Sciences
This unit manufactures glass and plastic labware, equipment, media and reagents enabling workflow solutions for scientific applications. In the first quarter, sales in Life Sciences grew 2.9% to $210 million and delivered 8.1% margin vs. 5.9% in first-quarter 2016.
For the second quarter, the Life Sciences segment is expected to have low single-digit sales growth year over year.
Net sales and net income
Corning had three-year sales growth average of 6.3%, profit growth average of 23.5% and profit margin average of 25.8% (Morningstar data).
Cash, debt and book value
As of March, Corning had $4.84 billion in cash and cash equivalents and $3.93 billion in debt with debt-equity ratio of 0.21 times vs. 0.25 times in the year-earlier quarter. In addition to lower overall debt in comparison, Corning was able to add more to its equity through retained earnings thus helping trim its leveraged balance sheet.
Of Corning’s $28.3 billion assets 8.6%Â were identified as goodwill and intangibles while having a book value of $18.4 billion vs. $18 billion in the year-earlier period.
Cash flow
In the first quarter, Corning delivered $191 million in cash flow from operations compared to cash losses in the year-prior quarter. Capital expenditures were $364 million leaving Corning with $173 million in free cash outflow.
Despite the cash outflow in the period, Corning was able to provide $568 million in dividends and share buybacks net options exercised. On average, Corning provided 222% of its free cash flow in dividends and buybacks.
Corning neither added to nor paid down its debt in the recent quarter.
Conclusion
Corning exhibited impressive growth in its operations over time albeit forecasting a little slowdown in the coming quarter.
The company’s most profitable and largest segment (on average in fiscal years) has gotten a boost brought by demand for phone(s). Corning’s Display business was further enhanced by its series of agreements with Samsung (SSNLF, Financial) through the now Corning-acquired Samsung Corning Precision Materials in early 2014.
Corning also has favorable cash levels accompanied by a strong balance sheet. In addition, the company has been overly generous to its shareholders in recent fiscal years in terms of payouts such as dividends and buybacks.
Meanwhile, 14 analysts have an average price target of $29.04 per share having minimal upside when compared to its share price of $28.91 (at the time writing).
Past three-year averages P/S multiples and sales growth rates followed by a 25% margin would indicate a value of $23.46 billion or $25.5 per share.
In summary, Corning is a hold with $28.8 per share value.
Disclosure: I do not have shares in any of the companies mentioned.
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