Corning Will Continue To Grow

Jul. 3.14 | About: Corning Inc. (GLW)

Summary

The growth in the specialty materials segment is expected to be strong over the next few quarters.

The Display Technologies Segment will continue to show stable growth as the demand for LCDs will remain stable in the near future.

The company might not take a big hit if Apple opts for Sapphire instead of Gorilla Glass for its new handsets.

Corning (NYSE:GLW) has been rising since the start of February and the stock has gained more than 23% year-to-date. During the last twelve months the stock has recorded gains of about 53%, mainly due to the strong growth in operations and growing demand for the products. Corning's business is divided into five segments: display technologies, telecommunications segment, environmental technologies segment, specialty materials segment and life sciences segment. In this article we will primarily look into the high growth areas of the company and also address the Gorilla Glass situation of the company.

Growth in Display Technologies Segment

In this segment, Corning manufactures LCD glass for flat panel displays. After its acquisition of Samsung Corning Precision, which was then renamed as Corning Precision Materials, Corning made a fortune in this segment. In the first quarter, the revenue in this particular segment more than doubled with 58% year-over-year growth. This growth was primarily driven by the falling LCD prices which subsequently increased the demand of LCDs. As a result the manufacturing volumes went up.

This trend is likely to continue further as the competition in LCD industry is fierce and newer technology keeps hitting the market every few months which motivates buyers who have much older versions to shift to the newer ones. As long as the prices are down, customers have more purchasing power which continues this cycle. Although, economic concept should buzz an alarm at this situation since the increase in demand for LCDs should stabilize the prices of LCDs, taking away the company's advantage. However, we believe that due to the competition and volumes being produced by so many different vendors in the market; it is highly unlikely. The reason is that there are many lesser known vendors in the market prepared to sell LCDs at a much lower rate. Larger brands need to keep their prices attractive in order to get good volumes. For this reason, we believe this situation will continue keeping Corning at an advantage.

The company is directing more of its capital expenditure towards this particular segment. Corning expects its capital expenditure for 2014 to be around $1.5 billion. Out of this, $560 million is set out for the Display Technology segment. We believe this segment will contribute to a significant growth in revenues of the company. The company expects growth in mid-to high single digits from this segment and remains confident on its market share.

Growth in Specialty Material segment

There have been concerns about the Gorilla Glass sales as Apple (NASDAQ:AAPL) might choose Sapphire for its upcoming products, which are manufactured by GT Advanced Technologies (GTAT). We believe that this matter should not worry investors as it does not carry much weight in the company's overall portfolio.

According to the 10-Q filings, Corning stated that 50% of its specialty material segment is accounted for by three major customers. One of these customers is Apple. The company's revenue for the first quarter of 2014 from this segment was $261 million. Even if we give 25% share to Apple in the specialty material segment, the company will be able to take this revenue hit if Apple indeed forgoes Gorilla Glass for Sapphire. However, there are rumors that Apple will only use Sapphire on the larger model of the new smartphone as the company is planning to launch two handsets this year. As a result, we do not believe Corning will lose all of Apple's business even if the company forgoes Gorilla Glass in favor of Sapphire.

In the first quarter of 2014, the company did face some setbacks due to Gorilla Glass and the specialty materials segment sales increased slightly. This growth was driven by advanced optics products of $15 million which was partially offset by a decrease in Gorilla Glass sales by $12 million. However, Apple's deal with GT Advanced Technologies was not the reason behind this decrease in demand. The decrease was related to customers' inventory buildup which was slowing things down for Corning.

Furthermore, the company stands prepared to lose this market share associated with Apple as the overall demand for Gorilla Glass is increasing. The company expects its second quarter sales from the specialty material segment to increase 20-25%, sequentially. The growth in the specialty materials segment should further support the overall growth for the company.

Conclusion

In our opinion, Corning is moving in the right direction. The demand of LCDs is also likely to continue in a stable manner and is expected to increase. The company is focusing its capital expenditure on this segment to make more out of this growing demand. Gorilla Glass will take the revenues further higher. We believe these factors will contribute to decent growth for the company in the coming quarters which will drive the stock price upwards.

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