Seeking Alpha
Recommended for you:
Research analyst, valuentum
Profile| Send Message|
( followers)  

Glass maker Corning (NYSE:GLW) reported strong second quarter results. Revenue jumped 11% year-over-year to $2 billion, easily exceeding consensus estimates. Core earnings per share increased 23% year-over-year to $0.32, also ahead of consensus expectations. Free cash flow was up slightly from a year ago at $151 million, equal to 8% of total revenue.

Corning's 'Display Technologies' business (think screens) drove the lion's share of growth as sales surged 21% year-over-year to $670 million, with earnings up 11% year-over-year. The lack of earnings leverage in the 'Display Technologies' comes from the presence of cheap foreign competition, which has led to market price declines. With further industry price declines imminent, controlling costs will be essential to driving increased profitability.

Top-line growth in the firm's 'Specialty Materials' segment, which houses the infamous Gorilla Glass, was unimpressive compared to the year prior, with revenue up just 2% year-over-year to $301 million. However, the segment saw revenue increase 17% sequentially as the market for its products reaccelerated. More importantly, management noted that Gorilla gross margins continue to improve, which is the likely driver behind the 33% year-over-year surge in segment earnings.

In addition to strong results from Gorilla Glass, revenue from Corning's 'Telecommunications' segment advanced 8% year-over-year to $601 million, driving the segment's core earnings 62% higher on a year-over-year basis. The firm creates optical fibers and cable systems used in expanding broadband networks, and management claimed strength was across the board, saying on the conference call:

"Sales beat our expectations, driven by stronger fiber at home projects in North America. Sales grew 28% sequentially, driven by an increase in demand for nearly all products in all regions, particularly North American fiber to the home in Canada and China fiber and cable."

This is certainly a recurring theme in the telecom sector as heavyweights like Verizon (NYSE:VZ) and AT&T (NYSE:T)continue to pursue network upgrades. With Google Fiber (NASDAQ:GOOG) potentially becoming a nationwide service, we like the demand prospects for fiber optics and other connectivity equipment going forward.

Looking ahead, Corning anticipates growth in LCD glass volumes as TV sizes continue to get larger-perhaps large enough (and inexpensive enough) to spur some demand at Best Buy (NYSE:BBY). 'Specialty Materials' revenue should accelerate 10-15% sequentially, while 'Telecommunication' revenue is anticipated to be consistent with current trends.

Valuentum's Take

Although cash generation at the firm remains strong, we think shares of Corning look fairly valued at this time, so we're not rushing to add shares to the portfolio of our Best Ideas Newsletter. In the electronics supplier industry, Jabil (NYSE:JBL) looks most attractive, scoring a 9 on the Valuentum Buying Index (at the time of this writing).

Source: Gorilla Glass Margins Continue To Improve At Corning

Additional disclosure: GOOG is included in our Best Ideas portfolio.