Corning: The Future Looks Bright

| About: Corning Inc. (GLW)
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Summary

Corning Inc. was upgraded by Susquehanna International Group from “neutral” to “positive”.

The company is putting efforts into availing itself of vast opportunities from the touchscreen products and automobile industry for its gorilla glass.

The transfer of gorilla glass manufacturing from Japan to Korea will prove cost-beneficial and further support the company’s bottom-line and competitive position.

The stock is undervalued based on its P/E ratio and is expected to earn EPS of $1.44 in FY 2014 up from $1.34 earned in FY 2013.

Corning Inc. (NYSE:GLW) was upgraded by Susquehanna International Group from "neutral" to "positive". Along with the upgrade, analyst Mehdi Hosseini increased the price target for the company's shares to $25 up from $15 reflecting handsome upside potential for investors as the stock is currently trading around $20.97.

The main reasons behind the upgrade and higher price target for the company's stock by analysts include positive prospects for the company due to the ongoing multi-year TV replacement cycle. Additionally, the expected rise in specialty glass demand from the smartphone, tablet, and automobile industries will also support the company's top-line.

Additionally, analysts are expecting persistent improvements in the company's bottom-line due to factors that include the company shifting its gorilla glass manufacturing from Japan to Korea. Therefore, I will look over the company's prospects in these areas that are expected to accelerate the company's growth and financial performance.

The company is a supplier of high-performance glass for LCD televisions, computer monitors, and other information display applications, optical fiber and cable, and hardware and equipment products.

Now let us discuss the expectations for the multi-year TV replacement cycle and how it will benefit Corning.

Multi-year TV Replacement Cycle Forecasts

According to analyst Mehdi Hosseini the prevailing multi-year TV replacement cycle is likely to increase Corning's earnings. This means that the analysts are anticipating more people to replace their current TVs along with a contraction of the time span after which households replace their television sets. According to Corning International president Musser, the flat-panel television replacement rate is predicted to fall to the 6- to 8-year range considerably shorter or rather faster than the 8-10 year replacement cycle of CRT televisions. One of the major drivers of the reduction in the replacement cycle is the continual advancement in technology that is attracting people and triggering them to switch to new ultra-high definition televisions with flatter and bigger screens. The attraction for people in switching to ultra-high definition televisions with flatter and bigger screens is basically due to enhanced viewing experiences at lower prices due to innovation. The following chart shows that LCD shipments are forecasted to recover in the coming years after declining since 2012.

Source: Electro IQ

Both the reduction in the replacement cycle and the rise in demand for large screen television will augment demand for Corning's LCD glass.

But while discussing the growth for Corning from the current multi-year TV replacement cycle analysts focused more on its positive impact on the company's earnings. So, in the following paragraphs I will elaborate on how this will have more of an impact on the company's bottom-line.

Prospects for Corning

The current multi-year TV replacement cycle, reduction in the TV replacement cycle, and rise in demand for large screen televisions will directly impact the company's display technologies segment. This is because this segment manufactures glass substrates for active matrix liquid crystal displays (LCDs) that are used mainly in notebook computers, flat panel desktop monitors, and LCD televisions. The segment has been the largest contributor to the company's total revenue and net income for the past three years. The company generated 32.5% of its total revenue and 74.8% of its total net income for FY 2013 from its display technologies segment. In FY 2012, the segment contributed 36.3% and 83.0% to the company's total revenue and total net income, respectively. This reflects the fact that the display technologies segment is more crucial to the company's bottom-line. Hence, top-line growth expectations for the segment are likely to boost the company's bottom-line in the coming years.

Gorilla Glass Growth from Touchscreen Products and Automobile

Gorilla glass is the most popular cover glass used nowadays in 2,400 products, 2.4 billion devices, and 33 major brands. The innovation by Corning in making the glass compatible for use in touch-enabled notebooks, marker boards, and the automobile industry opens up a new set of opportunities for the company to expand.

The touchscreen notebook computers segment is one of the fast-growing segments in consumer electronics. According to the company's international president Musser, Corning is working with manufacturers on about 20 touch-on-notebook models that should hit the market in the current fiscal year offering further opportunity to expand the company's gorilla glass business.

Beside tablets and notebooks, the smartphone industry also has more business for the company. Corning is readying itself to capitalize on the opportunities from this growth market by expanding its existence in the sub-$200 smartphone market. This would mean that gorilla glass is now targeting the low-end market while simultaneously expanding in the high-end market. This is in-line with the industry trend as the emerging markets have turned into major drivers of the global smartphone market and Corning has to fit in the low-cost smartphones in demand there.

In the automobile industry, the BMW i8 was the prime car to use gorilla glass in its rear window. As automakers are striving to reduce the weight of their vehicles by using aluminum bodies the lightweight nature of gorilla glass is in-line with this requirement. Therefore, the usage of this glass in vehicles will further help auto manufacturers to reduce the overall weight of their cars. Corning is working with numerous major auto makers to feature gorilla glass in various parts of their vehicles including sunroofs and windshields. The global auto glass is a 5.5 billion square foot market and Corning can capitalize on the sales growth opportunities for its gorilla glass from this market.

Transferring Manufacturing from Japan to Korea

In October 2013 Corning declared its acquisition of Samsung's stake in Samsung Corning Precision Materials Co. Ltd. (SCP.TO) now known as Corning Precision Materials Co. Ltd. (CPM). This acquisition became an equity affiliate of the company's display technologies segment as it is a foremost provider of LCD glass substrates to display manufacturers in Korea. Supported by this acquisition deal, Corning has recently announced the transfer of gorilla glass manufacturing from Japan to South Korea by FY 2015. The efficient utilization of the company's now fully-owned Korean facility will assist the company in improving its margins. The lower costs will allow the company to price its products more competitively, consequently strengthening gorilla glass against rival substitute product sapphire glass. This should aid the company in capturing additional orders for tablets.

Conclusion: Valuation, Further Ratings and Estimates

As elaborated by the analysis above, the company's major revenue and income generating segment, the display technologies segment, has bright prospects. Drivers such as the prolonged TV replacement phase and reduced TV replacement cycle for the coming years due to increased number of people switching to advanced and big screen televisions will contribute to the rise in demand for Corning's LCD glass. Additionally, the ability of the company's gorilla glass to fit in various applications such as touchscreen products and automobiles will bring further expansion for the company. In addition to the positive impacts from the top-line growth, the company's shift of gorilla glass manufacturing from Japan to Korea will also improve the company's bottom-line.

As you compare the tailwinds for the company discussed in the analysis above with the company's 15.5 TTM P/E that is well below industry average of 22.9, it will clearly indicate that the stock is worth investing in. TheStreet Ratings team rates the company as buy with a ratings score of B as the team expects the company to continue demonstrating growth in its EPS for the coming years. In FY 2013, the company improved its bottom-line by earning $1.34 per share in comparison to $1.15 earned in the previous fiscal year. For FY 2014, the market expects the company's earnings to improve to $1.44 up from $1.34 in FY 2013.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by a Gemstone Equity Research research analyst. Gemstone Equity Research is not receiving compensation for it (other than from Seeking Alpha). Gemstone Equity Research has no business relationship with any company whose stock is mentioned in this article.