Corning Gains From LCD Industry’s Long-Term Growth Prospects

by Trefis Team
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Corning (NYSE:GLW) has been reeling with weak earnings over the past couple of years due to declining LCD prices. Net income for the company declined from $3.6 billion in 2010 to $2.8 billion in 2011, and it dropped further by 37% on a year-over-year basis in the nine months ended 30 September 2012. [1] [2]

This downturn in the LCD industry is caused by excessive manufacturing capacity which led to significant LCD price erosion that hit Corning especially hard as LCD businesses constitutes nearly 53% of its total value, according to our estimates. The stock is down nearly 40% from its $22 price level of February 2011. Additionally, weak economic growth and high unemployment rates during this period have kept demand low, preventing LCD shipment volumes from rising which could help mitigate the impact from lower prices.

However, lower LCD prices have contributed to buyers adopting larger screen sizes. This increase in average screen size coupled with higher demand, which will come with an eventual recovery in global economy, will drive growth in Corning’s sales and earnings over the long term in our view. Additionally, the LCD technology is likely to remain as the dominant display technology for the foreseeable future in most consumer applications including TVs, monitors and laptops.

We currently a have a stock price estimate of $13 for Corning, marginally above its current market price.

See our complete analysis of Corning here

Growth in average LCD screen size

Declining prices in LCD TVs and monitors led consumers to opt for larger screen sizes. According to NPD Display Search, the average diagonal size of an LCD TV increased from 33.2 inches in 2010 to 35.9 inches in 2012. In 2013, this size is expected to rise further to 36.1 inches. Similarly, for LCD monitors the average diagonal size increased from 19.9 inches in 2010 to 20.7 inches in 2012. [3] In its immediate impact, this increase in average size contributes towards addressing the excess manufacturing capacity. However, over the long-term this increase in average size will contribute towards growing the market size. Once consumers adopt larger screens they find it extremely difficult to return to smaller screens.

In contrast to LCD TVs and monitors, laptops which also employ LCD screens saw their average diagonal size decline from 13.6 inches in 2010 to 12.1 inches in 2012. [3] This was due to growth of smaller-sized and ultra-portable notebook segments within laptops. However, this trend of a declining screen size in laptops is likely to be reversed in 2013, with the average diagonal size expected to increase to 12.2  inches. [3] In all, the impact from lower screen size in laptops was more than offset by larger screen sizes in TVs and monitors.

Recovery In Global Economy Will Raise Demand

Further, an eventual recovery in the global economy and rising disposable income will lead to an increase in demand for LCD applications like TVs, desktop monitors, laptops and mobile phones. This will contribute towards stemming the current price erosion in LCDs by addressing the excess manufacturing. Coupled with growth in average LCD screen size, this increased demand will drive growth in top line and net income for Corning. However, this expected economic recovery does not seem likely in the first-half of 2013 due to the continuing sovereign debt crisis in Europe and the uncertain economic growth environment in the U.S. and Japan.

LCD Technology Will Likely Remain Dominant

LCD dominates as display technology in large screen consumer applications like televisions, desktop monitors and laptops. It is used in nine out of ten TVs which are manufactured currently. Its closest competing technology – organic light-emitting diode (OLED) which is lighter and thinner – is more expensive in large screen applications and is expected to remain so in the near term. NPD Display Search forecasts global OLED TV shipments of 9 million in 2016. In comparison LCD TV shipments are expected at over 250 million in 2016. [4]

For smaller screen sizes, OLED has gained significant market share from LCD with some major smart phones utilizing the technology. But improvements in LCD technology in terms of picture quality and power consumption are helping the technology in holding its ground.

All in all, the LCD industry’s potential and recovery in global economy will in the long term overcome the current downturn in the industry to drive growth in Corning’s earnings.

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Notes:
  1. Corning 2011 10-K, www.corning.com []
  2. Corning 2012 Q3 10-Q, www.corning.com []
  3. Flat Panel Display Industry Poised for Recovery and Long-Term Growth, According to NPD DisplaySearch, October 16 2012, www.displaysearch.com [] [] []
  4. Global TV Demand Expected to be Flat in 2013, According to NPD DisplaySearch, October 24 2012, www.displaysearch.com []
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