Corning Up Against a Glass Ceiling

Following last Friday's analyst day, we believe Corning is positioned well for new growth opportunities. However, we remain on the sideline at the current share price given the glass-pricing trends and lack of upside to calendar 2014 earnings-per-share estimate.

Corning (ticker: GLW) held its annual investor meeting on Friday, Feb. 7, in New York City during which the company discussed its next-growth drivers including Willow glass (for flexible display app), new application for its Gorilla cover glass (while also arguing Sapphire is not a threat), Antimicrobial cover glass, and the Wireless Optical Distributed Antenna System (DAS).

In addition, Corning stated its key objectives for its main Display business, including bringing average sale price (ASP) decline to average trend line (by spring time frame), and better margin profile following the acquisition of Samsung's share in their joint venture. The company currently expects glass ASPs to decline at a higher-than-normal rate in the first quarter, but is optimistic to see the decline to return to moderate rate in the second.

Nonetheless, we currently see limited upside to our calendar 2014 EPS estimate of $1.42 versus consensus $1.45, and thus remain on the sideline at current share price.

We rate Corning at Neutral. Downside risk is $12, or 1.5 times forward enterprise value/sales to reflect a downturn.

In the Display business unit (33% of total fiscal 2013 revenue, accounting for 70%-plus of overall net-operating profit after tax (Nopat)): 1) stabilizing its Display business is Corning's key objective for FY14; 2) expect higher-than-normal glass ASP decline in the first quarter, but quarter-over-quarter ASP decline could return to normal trends by the second quarter; 3) competitors shutting down old glass capacities will positively impact glass supply/demand environment in the second-half of calendar 2014; 4) expect Lotus glass to capture growth in high-performance display (HPD) market, which is projected to grow at 35% compounded-annualized-growth rate (CAGR) from 2013 to 2017; 5) expect Willow glass to be finally commercialized for flexible displays application in the second-half of calendar 2014.

In Specialty Material, including Gorilla cover glass (15% of total revenue, 10% of overall Nopat): 1) expect Gorilla to return to growth in calendar 2014; 2) expect further cost reduction here to help improve margin profile; 3) Gorilla is adopted by automakers such as BMW, and Corning expects to expand into airplane and train markets; 4) near-term growth drivers for Gorilla are the increasing numbers of touch devices and larger average touchscreen size; 5) Corning does not expect much challenge from Sapphire since the company believes Gorilla is superior in performance, cost and weight; 6) new antimicrobial cover glass is a new and incremental growth driver.

In Optical Solutions (30% of total revenue, 10% of overall Nopat): 1) Corning's new revenue driver of One Wireless Optical DAS could capture the potential opportunity in the commercial building in the U.S.; 2) cloud computing, big data, data centers are driving demand for optical solutions; 3) Corning expects fiscal 2014 segment sales and profit of more than two times the telecom industry capital-expenditure rate.

In Environmental (12% of total revenue, 7% of overall Nopat): 1) several demand drivers are new regulations in China and EU could drive demand for regulated heavy-duty autos at 15%-20% CAGR until 2017 and, in North America, LEVII and Tier 3 regulations require 75% reduction in emission, and the new gasoline direct injection (GDI) engines require new filters that have a market size of $1 billion; 2) Corning expects Environmental gross margin to improve.

In Life Sciences (11% of total revenue, 4% of overall Nopat): 1) Corning expects double-digit profit growth here in calendar 2014 to reach $900 million (above our estimate of up 4% year-over-year); 2) the growth here is driven by increased content, e.g., per $1,000 in drug sales, Corning's potential sales is $33; 3) Life Sciences has provided relatively good returns given its low capital expenditures and research-and-development spending requirement; 4) Corning has no plan to spin-off Life Sciences.