Regardless of considerations about short-term points associated to slowing demand for key shopper merchandise equivalent to TVs and smartphones, I stay constructive on Corning (NYSE:GLW) as a result of anticipated development in its Optical and polysilicon options segments, which ought to offset weaknesses in different areas. Moreover, pricing developments and a possible restoration within the impacted end-markets might enhance earnings in 2023, particularly within the second half of the yr when Show and Smartphones are anticipated to rebound. In the long run, I anticipate that Corning will meet its development targets for income and earnings. I preserve a Maintain ranking on the inventory with a December 2024 worth goal of $40 on the inventory based mostly on a ~16x P/E a number of on the consensus 2024 earnings estimate for GLW.
Publish This fall-2022 Outlook
Corning expects weaker first-quarter outcomes as a result of influence of COVID-related coverage modifications in China on key end-markets equivalent to TV, smartphone, and automotive, in addition to slower-than-expected restoration in its Optical section as a result of delays in Telco initiatives. Nonetheless, the corporate anticipates that the primary quarter would be the weakest quarter and expects sequential income development within the second quarter, with year-over-year income development within the second half of the yr. Corning is optimistic a couple of rebound in panel demand, regardless of low TV retail demand, as a result of low stock ranges. The corporate has taken measures to organize for the restoration, together with worth will increase, productiveness changes, and stock normalization, which ought to allow Corning to generate higher margins and money movement. The corporate predicts a sequential margin enhance of 100-200 bps within the first quarter, regardless of a greater-than-typical decline in income as a result of seasonality. Nonetheless, the timing and magnitude of the rebound stays unsure.
China Restoration on the Playing cards
Corning famous the latest COVID state of affairs in China has led to demand headwinds driving decrease shopper spending and decrease workforce availability, which is impacting Show, Environmental and Specialty companies. For instance, Panel maker utilization improved within the months of October and November earlier than plateauing in December and moderating in January, and is now beneath the already tempered ranges of demand. Whereas Corning expects an eventual rebound in China, visibility as to the timing and magnitude stays restricted. That stated, Corning did recommend it expects sequential income development in 2Q23 and for year-over-year development in 2H23, suggesting much less materials headwinds relative to 1Q23.
Gradual 2023 Begin May Yield Higher 2H
The course of Corning’s 2023 gross sales will in all probability be decided by the energy of a 2H rebound from what could also be a difficult 1H, with makers of TV- and smartphone-display panels paring manufacturing, and telecom and cloud suppliers slowing investments in optical. Supportive pricing might proceed to cushion Corning’s show enterprise amid weak glass quantity. Show development is prone to return in 2H as panel makers ramp as much as meet seasonal demand. A rise in common TV- display sizes might additionally assist Corning, permitting it to realize share as extra manufacturing shifts to Gen 10 show vegetation.
Optical Beneficial properties May Fade Quickly
Corning’s optical-sales development seems poised to fall in need of the corporate’s double-digit goal in 2023 given the outlook for extra cautious telecom and cloud spending. A robust 1Q optical rebound from disappointing 4Q outcomes, wanted to remain on target to fulfill the goal, seems unlikely. With the US 5G community protection rollout largely full, I count on telecom suppliers to gradual the tempo of optical-fiber investments, which can be compounded by the impacts from softer hyperscale-cloud spending plans.
Much like the shows enterprise, worth hikes within the optical section ought to assist mitigate slower development. Regardless of prospects for a 1H gross sales decline, we consider the main focus will shift to community density, which ought to put Corning again on double-digit development monitor in 2H and thru 2024-25.
Pricing, Quantity May Support Margin
Corning’s worth will increase and operational streamlining might drive gross- and operating-margin enchancment in 2023 following multi-quarter lows in 2H in practically all of its enterprise segments. The weak point was most pronounced in show applied sciences, optical, and specialty supplies. Corning has some gross-margin help with glass manufacturing at or close to backside in 4Q22-1Q. The corporate has leverage to move on prices to TV- and smartphone-panel makers and fiber-optics prospects, which ought to assist gross margin growth as volumes enhance, particularly in 2H. Paired with modest expense cuts, that might preserve 2023 working margin unchanged.
My December 2024 worth goal of $40 relies on a ~16x P/E a number of on the consensus 2024 earnings estimate for GLW. The ~16x P/E a number of is at a reduction to the a number of at which industrial expertise friends commerce and is in-line with GLW’s historic NTM a number of, given draw back dangers stemming from shopper market publicity in a tricky macro surroundings in 2023.
Dangers To Draw back
The bulk of the present show market depends on LCD shows, with extra expensive OLED shows being the second hottest selection. A shift from present show applied sciences to a brand new kind that makes use of much less glass might have unfavourable penalties for the corporate. Corning’s Setting Applied sciences unit produces substrates utilized in emission-reducing catalytic converters for inner combustion engine autos. If electrical autos change into extra broadly adopted at a quicker tempo than anticipated, the Setting Applied sciences section might expertise decrease earnings than anticipated.
Corning’s show glass worth stability and worth hikes might assist a gross margin rebound and protect earnings tempered by top-line development as shopper electronics demand is prone to stay stubbornly weak over the subsequent a number of quarters. Whereas the optical section stays Corning’s key development engine, its 1Q outlook suggests to us that its double-digit development goal could also be tough to attain in 2023. Nonetheless, worth will increase and operational streamlining would proceed to drive gross- and operating-margin enchancment in 2023, for my part, following multi-quarter lows in 2H in practically all of its enterprise segments. I preserve a Maintain ranking on the inventory with a December 2024 worth goal of $40 based mostly on a ~16x P/E a number of on the consensus 2024 earnings estimate.