Gorilla glass maker Corning's (NYSE:GLW) first-quarter results are due next week on April 28. The maker of specialty glasses, ceramics, and related materials has reported solid gains this year with the stock up close to 20%. But, will Corning be able to sustain its solid growth after its upcoming earnings report, or is a downside in store considering the potential loss of its Apple (NASDAQ:AAPL) account due to GT Advanced Technologies' (GTAT) sapphire technology? Let's take a look.
What to expect
Analysts, as per Yahoo! Finance, expect Corning to post revenue of $2.30 billion in the first quarter. This would be a massive improvement of almost 27% from the year-ago quarter. Earnings, however, are expected to remain flat year over year, but the company's bottom line performance is expected to improve 18% for fiscal 2014 as compared to last year.
The massive bump in the company's sales is expected because Corning bought out Samsung's (OTC:SSNLF) share in a joint venture that both companies had entered into 20 years back. Looking ahead, there are a few factors that could contribute to Corning's strong earnings growth.
Corning is undertaking various initiatives such as strategic cost reductions in operating expenses to improve its profitability. The company's focus on manufacturing efficiency in optical communications, the environmental segment, and specialty materials should take it to new highs in the future. Also, the company expects that its optical communications business will be up in the mid-teens in the first-quarter with higher sales in carrier and enterprise in all regions, except China.
Corning expects to benefit from its renewed product portfolio, efficient and healthy inventory, and surging demand for glass production that is now well-aligned with glass supply. Additionally, Corning expects that PC market growth will be in the range of 7% to 12% this year, primarily due to sales of tablets.
Looking ahead, Corning forecasts approximately $2 billion in additional sales in its display segment after obtaining full ownership of Samsung Corning Precision that was manufacturing LCD glasses in Korea. It was an unconsolidated equity venture with Samsung Display. This acquisition should deliver strategic benefits to Corning as it has now full ownership and control of its global fusion-glass manufacturing platform, giving the company greater flexibility in asset use, improved operational efficiency, and more access to new specialty-glass market opportunities.
Corning has strengthened its base as it recently announced its partnership with a leading manufacturer of touch technology solutions, Atmel (NASDAQ:ATML), to manufacture cover glass for consumer electronics such as mobiles, tablets, and notebooks. The partnership should enhance Corning's product portfolio in the display market that comprises of Willow Glass and 3D-shaped Gorilla Glass.
Atmel's flexible touch sensors such as XSense should supplement Corner's 3-D Gorilla Glass to boost its sales with renewed multi-touch capabilities, enabling Corning to offer a complete range of display solutions for smartphone and tablets.
Moreover, Corning is a solid dividend payer. It had increased its dividend yield by 11% last year, taking the yield to 1.90%. The company also returns more cash to shareholders through repurchases, and repurchased $1.5 billion worth of shares in the last fiscal year. Considering the fact that Corning's payout ratio is still just 29%, the company has a lot of room to improve its dividend going forward.
Besides, Corning has total cash of $5.24 billion on the balance sheet, amounting to cash per share of $3.76. Its cash flow position is also strong, with operating cash flow of $2.79 billion and levered free cash flow of $612.62 million in the last twelve months. As a result, Corning's debt of $3.32 billion is well-covered due to its strong cash position and cash flows. Moreover, given the expected improvements in Corning's business, I think further improvements in the dividend could be on the way.
From a valuation point of view, Corning currently trades at a trailing P/E of 15.21 and a forward P/E of 12.43. Analysts anticipate a CAGR of 15.63% in earnings for the next five years. All this makes Corning a solid buy that can continue its strong performance going forward. However, there is one major concern that investors shouldn't ignore.
Apple is reportedly going to replace Corning's Gorilla Glass with GT Advanced Technologies' sapphire display in its upcoming iPhones. As reported by CNET earlier this year -
Speculation has been running rampant about Apple's plans for mobile devices with a sapphire screen. Those plans finally appear to be firming up, with 9to5Mac reporting Thursday that the electronics giant is getting ready for massive production of sapphire displays.
9to5Mac, with the help of analyst Matt Margolis, unveiled that the iPhone maker recently placed a large order with GT Advanced Technologies for furnaces and chambers used in making sapphire displays. According to 9to5Mac, GT Advanced has already received 518 furnace and chamber systems, which would let it build 103 million to 116 million 5-inch displays per year. (Another 420 machines are still on order, which would nearly double that production output.) GT Advanced also has ordered Intego Sirius Sapphire Display Inspection Tool components, which would work to make sure that the displays meet high-quality standards, 9to5Mac reported.
But, there is a good chance that Corning will retain its position in a majority of the iPhones due to the lower cost of Gorilla Glass. Corning management has come out with a counter argument why Gorilla Glass is still the best bet for iPhones in a video that you can see here. According to Corning executive Tony Tripeny -
When we look at it, we see a lot of disadvantages of Sapphire versus Gorilla Glass. It's about 10 times more expensive. It's about 1.6 times heavier. It's environmentally unfriendly. It takes about 100 times more energy to generate a Sapphire crystal than it does glass. It transmits less light which...means either dimmer devices or shorter battery life. It continues to break.
Considering these advantages of Gorilla Glass over sapphire, I think Corning is still very much in the driver's seat in this war.
Corning has great potential. The company has a solid balance sheet, returns cash to investors, and is making some good moves to grow the business. As such, there is a good chance that Corning's performance after its upcoming earnings report could improve further.
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.