Should You Buy Corning Going Into Earnings?

Jul.29.14 | About: Corning Inc. (GLW)

Summary

Production cuts indicate that Apple may stick to Gorilla Glass for the iPhone 6.

This will boost Corning's share price, while GT Advanced Technologies will be badly affected.

Corning is also expected to gain traction from the specialty materials market and LCDs.

Investors should buy Corning and sell GT Advanced Technologies ahead of earnings.

The rumor that GT Advanced Technologies (GTAT) is on track to supply sapphire for Apple's (NASDAQ:AAPL) upcoming iPhone, replacing Gorilla Glass, has had no effect on Corning's (NYSE:GLW) shares this year. Corning has appreciated 24% so far in 2014, and its first-quarter results were also strong. However, with Corning expected to release its second-quarter results this week, will it be able to sustain its momentum? Let's find out.

Solid growth expected

Corning is expected to report a 25% year-over-year jump in revenue. Its earnings are expected to increase to $0.38 per share from $0.32 per share in the year-ago period. The company's results are expected to be driven by its acquisition of Samsung Corning Precision Materials. In addition, a look at the company's strategies and the advantages over GT Advanced Technologies' sapphire indicates that Corning's solid performance is set to continue.

Gorilla Glass Isn't Dead Yet

Corning bears have consistently claimed that Apple is close to dumping Gorilla Glass in favor of GT Advanced Technologies' sapphire. Corning's share price will stumble if Apple decides to switch to a sapphire display for its iPhone 6, however I don't think it will happen.

Although sapphire is scratch resistant, producing sapphire for an iPhone-sized screen will cost 3-4 times more than Gorilla Glass. With the smartphone market saturating, I don't think Apple will risk putting expensive sapphire display in its iPhone and reduce its margins.

Due to the high cost of production, using sapphire for big-screened devices makes less sense. Thus, I don't think Apple will use sapphire for the iPhone 6, which is rumored to have a 4.7-inch and 5.5-inch screen. However, I do think Apple will use sapphire display for the iWatch, which is anticipated to have a variable screen size ranging from 1.7-inch to 2.5-inch.

In addition, recent reports suggest that Apple's iPhone 6 will not feature a sapphire display indeed. MacRumors recently published:

The report notes that Apple's sapphire display may cost 1743 yuan (or $280) in materials, which is a significant jump over the $44 estimated for the 4-inch Retina display used in the iPhone 5s. This extra expense could increase the retail price of the next generation iPhone by approximately 50 percent, which may price the smartphone beyond the affordability point for most consumers.

This rumor corresponds with an earlier report from analyst Ming-Chi Kuo, who suggested that supply constraints may force Apple to reserve the sapphire display for premium iPhone models such as the 64GB version of the 5.5-inch iPhone 6.

Also, UBS recently downgraded GT Advanced Technologies from "buy" to "hold" due to production constraints. UBS analyst Stephen Chin said:

Our monthly checks found GT had a successful month of May at its Arizona sapphire fab and estimate it shipped 1.6M two-inch equivalents (TIEs) of sapphire (up 60% m/m) to one of Apple's cover screen suppliers.

Due to the shortage of sapphire, Apple may decide to stick to Gorilla Glass for at least one of the two rumored versions of the iPhone 6, and with the sales of the flagship phone already expected to do 20% better than its predecessor, I don't think Corning will struggle.

More Positives

The company witnessed optimistic views from Hemlock's customers, and it is seeing stability in the polysilicon market as well. Sales from specialty materials will jump 20%-25% this year. Despite slow sales in notebooks and desktops, sales in tablets are expected to rise this year. Benefits from the Corning Precision Material, or CPM, business in Korea and the resulting synergies from it will accelerate the operating results. The company is adopting cost control measures, and is also focusing on reducing expenses.

Corning expects to land more orders in the LCD market as consumers are preferring LCDs over small screen TVs worldwide. In addition, ultra high definition televisions with bigger screens will generate robust demand. The company expects to supply panels for about 26 million ultra HD sets this year.

Valuation

Corning's impressive valuation is another plus point. It trades at a trailing P/E ratio of 18. Comparatively, the forward P/E is lower at 13. This means that Corning's earnings are expected to grow in the future. This is indeed the case, as for the next five years, Corning's earnings are estimated to increase at 15% a year, as compared to a loss of 2.85% a year in the last five years. Investors shouldn't worry much about the GT Advanced threat as Gorilla Glass has its own advantages, and its strong fundamentals make it a stock worth investing in.

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