Corning - Samsung Deal Is A Huge Value Driver

| About: Corning Inc. (GLW)

Shares of Corning (NYSE:GLW) jumped up on Tuesday in after-hours trading after the company announced a big collaboration with Samsung (OTC:SSNLF).

The deal is expected to be hugely accretive to shareholders in Corning, which should applaud the deal. Shares are trading with gains of around 25% in after-hours trading, trading at around $19 per share, the highest level since the start of 2011.

Collaboration With Samsung

Corning announced that it will significantly strengthen its strategic and financial collaboration with Samsung. The deal is expected to extent the leadership in specialty glass and boost earnings growth.

As a result of the deal, Corning will obtain full ownership of Samsung Corning Precision Materials, a joint venture which manufactures LCD glass in Korea. Samsung Display currently owned 43% of SCP.

Samsung Display will hold a convertible preferred share investment in Corning with $1.9 billion in face value. Samsung Displays will invest another $400 million in Corning by subscribing to new convertible preferred shares.

Samsung Display will hold a 7.4% ownership in Corning as a result of the deal, once and if shares are converted into common shares. To guarantee a prosperous future, Corning and Samsung Displays signed a new long-term LCD Display glass supply agreement through 2023.

CEO and Chairman Wendell P. Weeks commented on the rationale behind the deal, "We are excited to enter this new era of collaboration in our 40-year equity relationship with Samsung, one of the world leaders in consumer electronics. The agreements provide important financial and strategic benefits to both Corning and Samsung."

Third Quarter Results

Besides announcing this major deal, Corning also released its preliminary third quarter results. Corning generated third quarter revenues of $2.07 billion, up 1.4% on the year before.

Net earnings fell 23.5% to $408 million, as diluted earnings per share fell from 8 cents to $0.28 per share.

Note that Corning will release the definitive results in a week's time.


Corning didn't provide a balance sheet yet with its third quarter results. Corning ended the second quarter with $5.5 billion in cash, equivalents and short term investments. Total debt stood at $2.9 billion, for a solid net cash position of around $2.6 billion.

Revenues for the first nine months of the year came in at $5.9 billion, unchanged on the year before. Net earnings rose slightly to $1.5 billion. As such, annual revenues could come in around $8 billion as earnings could approach $2 billion.

Trading around $15.50 per share, Corning is being valued around $22.5 billion, or its operating assets at $20 billion. This values the operations at 2.5 times annual revenues and 10 times earnings.

Corning currently pays a quarterly dividend of $0.10 per share, for an annual dividend yield of 2.6%.

Some Historical Perspective

Shares of Corning have seen quite some volatility over the past decade. Shares traded around $10 in 2004 to a peak around $30 in 2006. Ever since, shares have mostly traded in a $10-$20 trading range, currently trading around $15 per share.

Between 2009 and 2012, Corning increased annual revenues by a cumulative 50% to $8.0 billion. Net income fell by some 15% to $1.7 billion in the meantime, after the company reported peak profits of $3.5 billion in 2010.

Note that Corning has repurchased some 5% of its own shares at a modest pace in recent years.

Investment Thesis

Essentially the move by Samsung is designed to get a better handle on its supply chain in its competition against Apple (NASDAQ:AAPL). Note that Corning with its Gorilla glass is a key supplier to Samsung's Galaxy phone line. Samsung and Corning could co-develop technologies, crucial for the next generation of devices, such as wearable devices. As such, Samsung is able to secure supplies and integrate its supply chain, while Corning can further share development risks.

Pegged at $2.3 billion, Samsung will hold a 7.4% stake in Corning, thereby essentially valuing the company at $31 billion, or around $21 per share. Preferred shares have a 4.25% coupon and are convertible 7 years time at $20 per share. Corning will use most of the cash balances of Samsung Display and cash investments to repurchase some $2 billion of its own shares, more than offsetting dilution from the stake of Samsung. With shares trading around $19 per share in after hours trading, Corning could retire about 7% of its shares outstanding.

Note that Corning will own the entire Samsung Display venture, established in 1995. The venture also supplies to Apple, Sony and Lenovo, and full control over the venture would add about $2 billion in annual sales and add about $350 million in annual earnings. The deal is expected to close in the first quarter of 2014. With the deal Corning will get access to $1.2 billion of Corning's share of cash on SCP's balance sheet, while free cash flows could total another $2 billion in the coming four years.

Synergies from integrating glass assets could total $100 million in 2015, expected to grow in the years thereafter. As such, core earnings per share could increase by 20% in both 2014 and 2015, on the back of synergies and share repurchases. Lower capital expenditures could be seen as well given the combined melting capabilities.

All in all, shares of Corning jumped to $19 per share, boosting the value of the firm by a cool $6 billion on the back of the deal. The nearly $28 billion valuation implies a valuation of around $25 billion for Corning's operating assets. Now add to that the accretion projections and Corning should generate annual revenues of $10 billion as earnings could see accretion towards $2.5 billion going forwards. This would imply earnings of at least $2.00 per share in 2015 and beyond, warranting the big run-up in after-hours trading on Tuesday.

All in all, Corning has made a great deal with Samsung, or actually the deal is beneficial for both parties. More important, it signed a long term contract which provides security and should speed up developments. That being said, the big jump on Tuesday boosted the market capitalization of the firm already by $6 billion, pricing in most of the expected accretion already.

I remain cautiously optimistic as I think Corning has made a solid deal and the overall valuation remains appealing enough going forwards.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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