Corning Stock: Growth Opportunities in Fiber Optics and Connected Cars (NYSE: GLW)

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Corning (NYSE: GLW) had a strong quarter on the back of strong performances across all segments except environmental technologies, which were impacted by lower automotive production levels due to component shortages. GAAP sales for the first quarter of 2022 (ended March 2022) increased by 12% Year on year to $3.7 billion, while gross profit rose 11% to $1.3 billion. Operating income rose 13.5% to $570 million, but net income fell 3% year-on-year to $581 million.

Corning’s optical communications segment – its largest segment by revenue – continued to be a major growth driver with revenue jumping 28% year-over-year to $1.2 billion, driven by increased capital expenditure by network operators to meet demand for 5G, broadband and cloud. The segment’s net profit jumped 50% year-on-year to $166 million.

Corning’s Display Technologies segment — its second-biggest revenue — rose 11% year-on-year to $959 million, driven by higher glass volumes and prices. The segment’s net income also increased 11% year-on-year to $236 million.

The Specialty Materials segment – third in terms of revenue – increased 9% to $493 million, driven by strong demand for Corning’s premium roofing materials and advanced optics products thanks to robust demand from the semiconductor and mobile device markets. Net income, however, fell to $75 million as Corning ramped up investment in innovation programs that the company says are moving toward commercialization.

Corning’s fourth largest segment by revenue – environmental technologies – was the only segment to see lower revenue for the quarter, with revenue down 7% year-over-year to $409 million, as component shortages limited automobile production. Net income for the quarter was unchanged at $74 million.

The life sciences segment saw a 3% year-over-year increase in revenue to $301 million. Net profit, however, fell 13% due to pandemic-related operational challenges that impacted production.

The Hemlock segment and the Emerging Growth Businesses segment saw the fastest revenue growth this quarter with revenue jumping 38% year-over-year to $375 million, driven by growing demand for solar materials. The segment’s net loss, however, increased 67% year-on-year to $8 million.

Pricing actions helping to offset near-term challenges from inflationary pressures

Corning’s gross margins for the first quarter of 2022 contracted slightly to 34.8% in the quarter, from 35% in the same quarter last year, likely due to cost pressures, offset by pricing actions across all businesses that helped improve gross margins sequentially, albeit by a fractional amount.

Overall, despite inflationary pressures in recent quarters, Corning’s margins have held up reasonably well, indicating the company’s pricing power. Corning management also expects pricing actions to continue to support margins in the next quarter.

Long-term growth of the fiber optic business

Corning’s optical communications segment (which provides fiber optic communications system solutions to network operators) has been a major growth driver for the company in recent times and is expected to remain so for the long term. The segment, which accounts for the bulk of the company’s revenue (31% in 2021), grew 22% year-over-year in fiscal 2021, driven by increased investment in broadband, cloud and 5G. The segment’s rapid revenue growth is a sharp increase from fiscal 2020 when segment revenue fell 12% and fiscal 2019 when revenue fell 3% year-over-year.

2021 Corning segment revenue

Corning inc.

Next-generation technologies such as 5G, IoT, cloud, HD video, and AI, among others, demand higher bandwidth and faster connections, driving the demand for fiber optic cables . Market research firms predict skyrocketing growth for the fiber optic market with projections of up to 26% CAGR expected through 2026.

Global fiber optic market

The Business Research Company

Market leader Corning is well positioned to capture this growth. The main growth markets for fiber optics are the United States and China, and Corning is very well established in both of these markets. The Fiber Broadband Association (FBA) has revealed that fiber broadband in the United States grew by 12% in 2021 and is entering the largest investment cycle on record. Corning expects to benefit from the US Infrastructure Investment and Jobs Act, which has allocated about $65 billion for broadband investment. The opportunity is a boon for Corning, the American leader in the fiber optic market.

The climate is much the same in China, with the country’s fiber optic market expected to grow steadily over the next few years. Corning has served the Chinese fiber optic market for years and also has fiber optic manufacturing facilities in the country.

Fiber optic market in China

Statistical

Stable outlook for Display Technologies and Specialty Materials

Corning’s Display Technologies segment, which accounts for approximately 27% of revenue (in 2021), produces glass substrates for flat-panel displays, including LCDs (liquid crystal displays) and OLEDs (organic light-emitting diodes) that are used in electronic devices such as laptops. , televisions and mobile phones. The segment recorded strong growth of 17% YoY in 2021, reversing a downward trend in sales in recent years (Display Technology segment sales fell 3% YoY in 2020 and 1 % YoY in 2019), helped by e-learning and remote work trends which saw PC shipments reach double-digit growth rates in 2021. The PC boom, however, appears to be waning (IDC expects global PC industry sales to decline 1.1% in 2022), which could dampen the segment’s revenue growth in the coming year. Corning management expects glass retail demand to grow by a high single-digit percentage in 2022.

Long-term growth projections for the display glass market are expected to be generally positive, with projected single-digit growth in the coming years, which is positive for Corning, the world’s largest producer of display glass substrates. ‘display.

Corning’s Specialty Materials segment, which is responsible for the company’s Gorilla Glass business, accounts for approximately 14% of the company’s revenue (in 2021). Operating in a wide variety of commercial and industrial markets (including mobile consumer electronics, semiconductor equipment optics, aerospace and defense optics to name a few), this segment has consistently seen positive year-over-year revenue growth over the past few years (up 7%, 18%, and 8% in 2021, 2020, and 2019, respectively). Heavily protected by an extensive patent portfolio, this segment offers potentially attractive long-term growth opportunities as Corning explores opportunities in the automotive glass sector. The company is already an established supplier to the automotive industry, with the company noting that it has secured over $1 billion in revenue from several automakers. As part of its “more Corning” strategy (which involves getting existing customers to adopt more Corning products), the company is banking on connected cars to drive sales. Consumer demand for infotainment and connectivity is ushering in an era of connected cars and Corning is looking to capitalize on this opportunity by offering automotive display panels to bring the smartphone experience into the car. Corning estimates this would be a $100 per car opportunity.

Environmental technologies benefiting from increasing regulation

Corning’s Environmental Technologies Division, which accounts for approximately 11% of sales (as of fiscal 2021), manufactures ceramic substrates and filter products for emission control systems that are used in light-duty and heavy-duty vehicles . The division has seen robust revenue growth in recent years (up 16%, down 9%, and up 16% in fiscal 2021, 2020, and 2019 respectively), and may continue to generate revenue. returns as emissions control requirements increase. The World Health Organization (WHO) is calling for accelerated action to enforce tougher vehicle emissions standards and the US Environmental Protection Agency (EPA) has proposed new engine standards to reduce emissions from heavy-duty gasoline and diesel engines. The trend is positive for the medium-term segment, but the longer-term outlook might not be so rosy due to the electrification of the transport sector.

finance

There are few companies comparable to Corning. Italy’s Prysmian (OTCPK:PRYMF) (which competes with Corning in the fiber optic market – Corning’s largest business) is broadly similar to Corning in terms of gross margins and return on assets, but Corning has a significantly better debt position. Corning trades at a P/E of just 15 and, at current prices, offers a dividend yield of almost 3%.

Corning

Prysmian

Year-on-year revenue growth %

18.6%

27.6%

Gross margin %

36%

31.5%

EBIT margin %

16.3%

4.6%

Return on assets %

4.9%

3.4%

Total Debt / Equity %

61.2%

121%

PER

15.3

23.8

Dividend yield

2.99%

1.9%

Summary

Corning’s strong quarterly and annual results were driven by strong market demand and price increases across all business segments. Pricing actions should support margins over the coming year to counter inflationary pressures.

Over the long term, two of Corning’s major business segments stand out as potential growth engines; Fiber Optics – which represents a third of sales – should remain a key growth driver. Potential growth opportunities in automotive displays could boost the specialty materials segment, which accounts for around 14% of revenue.

Analysts are generally bullish on the stock.

Corning analyst rating

WSJ

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