Corning (NYSE:GLW) will announce its third quarter earnings Wednesday, October 24.  The company posted lower revenues and net income in the first half of 2012 compared to the same period previous year. Revenue was $3.8 billion, down 3% y-o-y, and net income was $924 million, down 39% y-o-y, in the six months ended June 30, 2012.  This severe decline in performance was caused by declining LCD prices, lower demand and prices for silicon products, and higher taxes for Corning.
The rate of decline in LCD prices however moderated in the third quarter as companies focused more on margins than volumes. Yet, LCD prices were significantly lower compared to Q3 2011. On the bright side, we anticipate the continuing growth in sales of Gorilla Glass and optical fibers and cables to partially offset the impact of lower LCD prices.
On the whole, Corning has had another tough quarter to negotiate. We currently have a stock price estimate of $13.07, approximately 5% below its current market price.
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Declining LCD prices to continue to impact Q3 earnings
The prices of LCD glass substrates have been declining since the last quarter of 2011 due to overcapacity and reduction in the amount of inventory in supply chain. This has impacted Corning’s earnings from the display technologies division and its equity earnings from Samsung Corning Precision, a 50-50 joint venture between Corning and Samsung to manufacture LCD glass substrates. Together the two divisions constitute approximately 52% of the total company value.
Although the rate of decline in LCD prices moderated sequentially in Q3 2012, LCD prices were significantly lower compared to the year-ago levels. Hence, lower LCD prices will continue to impact Corning’s earnings in the third quarter.
Also, the decline in demand and lower prices for high purity polycrystalline silicon used in semiconductor and solar industries manufactured by Dow Corning will weigh on its Q3 earnings. Dow Corning, a 50-50 joint venture between Dow Chemical and Corning, constitutes nearly 12% of the company’s total value.
Gorilla Glass sales growth to partially offset the impact
On the bright side, we anticipate the continued growth in sales of Gorilla Glass and optical fibers and cables in the third quarter to partially offset the impact of declining LCD and silicon prices.
Gorilla Glass, which is used as a display surface in smartphones, tablets and other hand-held display devices, has been witnessing strong sales growth with the increase in sales of these devices. It is part of the specialty materials division which constitutes nearly 10% of the overall company value.
Optical fibers and cables, which were pioneered by Corning nearly 45 years ago, are also seeing sales growth driven by the demand from emerging economies. Currently, the optical fiber network capacities in these countries is much lower to that in developed countries. Hence, sales of optical fibers and cables will drive earnings growth for Corning in Q3 and beyond.
All in all, Corning’s third quarter earnings will be impacted by declining LCD and silicon prices, partially offset by higher sales of Gorilla Glass and optical fibers and cables.Notes: