Ignore The Sapphire Threat, Corning Is On A Roll

May.21.14 | About: Corning Inc. (GLW)

Summary

Corning is making good advancements in improving its earnings by focusing on cost control and synergies from its CPM acquisition.

Corning's earnings are expected to grow at a robust pace over the next five years, which makes it a good buy at its current valuation.

GT Advanced Technologies' sapphire display is a threat, as it could replace the Gorilla Glass in Apple iPhone, but investors shouldn't be overly concerned right now.

Shares of Gorilla Glass maker Corning (NYSE:GLW) are beating the market this year. Corning is up almost 20% in 2014 despite concerns about declining prices in its LCD and specialty materials business. In addition, Corning's performance has defied fears that GT Advanced Technologies (GTAT) can end up replacing the Gorilla Glass with its sapphire crystal display in the next Apple (NASDAQ:AAPL) iPhone.

Hence, Corning has done well in the face of adversity, but will the company continue performing well going forward? Let's take a look.

Improvements expected ahead

Corning has a number of strategies in store for 2014. It is looking to continue the positive momentum in the display business, integrate the acquisition of Samsung Corning Precision Materials, or CPM, business in Korea in order to realize higher synergies, gain further cost advantages, and increase its flexibility of glass supply.

During the first quarter, Corning had closed the acquisition of CPM and started with its integration activities. The improved manufacturing efficiencies resulted in an improved gross margin performance and the realization of synergies in display. It executed customer negotiations for lower price declines on LCD glass for the second quarter. The company's core sales grew with optical communications and environmental exceeding expectations. Hence, Corning seems to be making good progress to reduce the effects that price declines have had on its performance.

In addition, Corning is focusing on controlling its operational expenses aggressively. It grew its core net profit after tax and EPS by 7% year over year, and executed a $1.25 billion accelerated repurchase program. Hence, Corning is making solid progress on improving its bottom line.

Going forward, the business prospects in Corning's end-markets also look strong. The overall LCD retail and glass markets, as measured in square feet of glass, are expected to be up in the mid to high single digits. LCD TV units are expected to grow in low to mid-single digits, but area growth will likely be higher. The trend of consumers buying larger televisions is projected to continue, giving Corning an opportunity to increase sales.

The ultra-high definition television is a high-end category that's expected to drive Corning's business in 2014 and beyond. In fact, around 26 million Ultra HD panel shipments are expected to be shipped in 2014, up from 2.7 million in 2013.

Other segments are also strong

Corning's other businesses also seem to be gaining momentum. Sales in the optical communications business were up 26% in the previous quarter versus last year, and better than expected. Going forward, carrier networks in North America and the EMEA region are expected to drive this business. Sales of fiber-to-the-home and data center products are gaining momentum, indicating better times ahead. Also, there's a strong shift in the market toward optical products. As a result, the company is witnessing much strong fiber demand earlier than expected.

Corning's sales in the specialty materials segment are expected to be up 20%-25% in the current quarter, driven mainly by higher Gorilla Glass volume. The supply chain's preparation for upcoming new product launches will be driving the volume growth of Gorilla Glass.

A threat to watch

However, one big threat that Corning investors cannot ignore is GT Advanced Technologies' sapphire display. According to MacRumors, the specs of the next iPhone are expected to sport a sapphire crystal screen. Apple and GT Advanced Technologies entered into a partnership last year with the smartphone giant locking in supply of sapphire for its devices. Now, in March, it was reported that Apple is getting ready to expand GT's sapphire plant in Arizona. According to TechCrunch --

"Apple is said to be exploring options to expand the facility it's building with manufacturing partner GT Advanced Technologies in Arizona, a facility which is going to be used to help the companies build sapphire components for future devices. The proposed expansion, reported by AppleInsider, would see the facility plans potentially double in size, and is currently seeking bids from contractors for its completion.

A planned expansion could suggest that Apple is looking to do more volume with its sapphire production late this year and into next than it had previously intended. Rumors suggest that the company is looking into the possibility of releasing two new devices by the end of the year, including both a 4.7- and a 5.5-inch iPhone. It isn't yet clear whether it will use sapphire for its new displays, but recent patents filed by the company indicate that Apple is at the very least researching techniques to make sapphire displays work with touchscreen devices."

Hence, an increase in sapphire demand by Apple could hurt Corning's long-term prospects as it currently supplies Gorilla Glass to the smartphone giant. Apple is expected to produce 80 million iPhones this year, and if it replaces Corning's Gorilla Glass with sapphire display, then it could be a big setback.

But looking at the present scenario, Corning looks like a good investment. According to Corning, sapphire is about 10 times more expensive than Gorilla Glass. Also, it's about 1.6 times heavier. Corning says that it takes about 100 times more energy to generate a Sapphire crystal than it does glass.

Conclusion

So, investors should continue having faith in Corning, and its valuation is also quite good. Corning's trailing P/E and forward P/E ratios of 17.20 and 12.52, respectively, indicate strong cost cutting efforts and growth going forward, leading to an increase in earnings. The PEG ratio of 0.92 signifies undervaluation as well. Corning's earnings growth CAGR for the next 5 years is also promising at 15.10%. Hence, investors should stay invested in Corning as it looks like a solid investment.

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.