Yen Hedges And Higher LCD Shipments Could Lift Corning’s Earnings

by Trefis Team
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    Quick Take 

  • In the second quarter, Corning’s earnings will likely face more moderate LCD price declines, which could be offset by growth from higher LCD shipment volumes and gains from yen hedging.
  • Growing Gorilla Glass sales will also help lift the company’s results.

Corning (NYSE:GLW) will announce its second quarter earnings on July 30. The company is coming off a tough previous quarter where it posted a 6% annual decline in top line due to yen weakening and continued drop in LCD prices, partially offset by higher LCD shipment volumes. [1] In the second quarter, we anticipate LCD price declines to continue to weigh on Corning’s results; however, gains from yen hedging and higher LCD shipments driven by gradual recovery in global demand for televisions, notebooks and smartphones will likely grow the company’s core operating results.

We currently have a stock price estimate of $14.26 for Corning, around 5% below its current market price.

See our complete analysis of Corning here

LCD Price Declines vs. Increased LCD Shipment Volumes

Last year, profits from Corning’s wholly owned LCD glass business, called Display Technologies, and its equity earnings from Samsung Corning Precision, which also manufactures LCD glass, declined significantly due to severe LCD price declines. In the first quarter of 2013, price declines were relatively less severe as significant portions of the industry’s manufacturing overcapacity was addressed through higher demand and slower capacity addition. For the second quarter, Corning estimates LCD glass prices to fall by 2%-3% from the first quarter. [1]

On the bright side, the negative impact from LCD price declines could get offset by higher LCD glass shipment volumes. Driven by larger screen sizes across devices that include televisions, monitors, tablets and smartphones coupled with their rising demand, Corning’s LCD glass shipment volumes could grow in the second quarter. For full year 2013, Corning estimates global LCD glass retail market to grow in mid-to-high single-digit percentage range from 2012. [2]

Hedges Against Yen Weakening Prevent Losses

Additionally, in light of continued pressure on Japanese yen, which traded around high 90s to a dollar through most of the second quarter, Corning’s gains from its yen hedges will be in focus in the coming earnings.

Last quarter, a sudden weakening in the value of yen relative to the dollar impacted profits at the company’s LCD glass segment. The yen’s value against the dollar moved from below 80 in October last year to above 90 in February this year. [3] This sharp drop impacted results at Corning’s display segment as a large portion of the company’s LCD glass is priced in yen, which yielded fewer dollars on currency translation due to its weakening.

As the display LCD glass segment constitutes the largest portion of Corning’s value among other segments, the company moved quickly to enter in to hedging agreements during the previous quarter to prevent losses from further decline in the value of yen. As a result of these hedges, Corning effectively capped its economic exposure to further weakening in yen at 93 yens to a dollar. We anticipate significant benefits from these hedges in the second quarter results, as yen traded at over 93 to a dollar throughout the second quarter. [3]

Gorilla Glass Sales To Aid Growth

Separately, we also anticipate the company’s second quarter earnings to benefit from rising sales of its market leading Gorilla cover glass. This glass is part of Corning’s Specialty Materials segment, which constituted around 7% of its earnings in 2012, with a major portion of the segment’s total income coming from Gorilla Glass. This cover glass for smartphones, tablets and touch-enabled notebooks has been the fastest growing business of Corning, grossing over $1 billion in sales last year after launch in 2007. [2]

Over the long term, Corning believes that sales of Gorilla Glass can double on growth in its market size, which is being driven by unit sales of touch-enabled mobile devices and their increasing screen sizes as well as the emerging trend of touch on notebooks.

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Notes:
  1. Corning’s Q1 2013 earnings form 8-K, April 24 2013, www.corning.com [] []
  2. Corning’s 2012 10-K, February 13 2013, www.corning.com [] []
  3. USD to Japanese yen exchange rate, July 29 2013, www.bloomberg.com [] []
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