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Summary

  • A decline in prices for LCDs will pressure Corning’s earnings going forward.
  • The increasing activity of Apple with regard to sapphire display is a threat for Corning.
  • Corning is trying to put up a brave face by focusing on its other operations, but its earnings growth could slow down due to the various threats it faces.

Gorilla glass maker Corning (NYSE:GLW) has turned in a pretty strong performance this year. Corning shares are up close to 20% this year on the back of its consistent performance. Corning's earnings have been better than the market's expectations in the last four quarters. However, its revenue declined almost 9% in the last reported fourth quarter. Looking ahead, Corning could face weakness in the business as its Gorilla Glass is being challenged by GT Advanced Technologies' (NASDAQ:GTAT) sapphire display, which Apple (NASDAQ:AAPL) will purportedly use in the next iPhone.

The GTAT threat

Just recently, Apple applied for a patent regarding oleophobic coating on sapphire. As reported by AppleInsider -

"Specifically, the filing describes in detail the methods by which an oleophobic, or oil-repelling, coating can be applied to a sapphire slab prior to installation in a mobile device. Oleophobic coatings were first used by Apple with the iPhone 3GS in an attempt to counter the buildup of oil and other detritus inevitable with a touchscreen display.

Apple notes the end result of this sapphire-transitional layer-surface layer sandwich is a largely continuous and uniform structure that retains the benefits of sapphire's hardness, while allowing for the operable application of an oleophobic coating."

In another recent development, it was reported that Apple is planning to expand its Arizona sapphire plant to boost output along with GT Advanced. MacRumors reports that KGI Securities analyst Ming Chi-Kuo is of the opinion that Apple could equip its high-end iPhones, such as the expected 64GB 5.5" iPhone 6, with sapphire display. Since the demand for larger-screened phones is huge, especially in markets such as China, Apple could see strong sales for the iPhone. But at the same time, Corning could lose out on this opportunity as GT Advanced looks to be in a prime position to benefit from this technology.

Putting up some resistance

However, Corning is preparing itself to face the negative effects of such an event by focusing on its other business segments. Corning has completed a transaction with Samsung for the full ownership of its equity venture SCP. It now expects numerous strategic and financial benefits that will strengthen the LCD business, broaden its relationship with Samsung, and provide outstanding returns to shareholders.

In addition, LCD glass demand is strong according to management, and it is believed to be driven by good retail demand for larger televisions going forward. In the optical fiber communications segment, Corning has increasingly moved into providing optical solutions that include hardware and equipment. Today, it is a comprehensive provider of industry moving optical solutions across the broader communications industry. Q4 sales in this segment were up 12% to $605 million, which was better than expected. The improvement in the optical communications income was driven by additional sales volume and manufacturing efficiencies.

Some more problems

However, Corning is already facing some weaknesses. Gorilla Glass volumes sold were weak and this impacted the gross margin. Moreover, the increase in sales in optical communications was driven by lower-margin products. In addition, increased air freight costs are also negatively impacting manufacturing efficiencies in the display business, creating more headwinds for Corning.

In addition, though Corning expects demand for its glass to remain strong this year on the back of higher television sales, the same cannot be said regarding pricing. As reported by Bloomberg -

"LCD prices will drop more than in previous periods, Corning said today in a statement. The decrease will be compounded by the unit's traditional first-quarter dip in volume from the previous three-month period, the company said. The display unit's sales dropped 5 percent in the fourth quarter from a year earlier, excluding currency changes and other items."

Final words

This will further hurt Corning's bottom line, which has seen stunted growth over the past five years, growing at a CAGR of just 3.39%. So, even though Corning is trying to present an upbeat picture about its business, I think it would be better for investors to stay away from the stock as it could be pressured by GT Advanced's sapphire business and the decline in LCD prices.

Source: Why You Should Stay Away From Corning