VALUATION HIGHLIGHTS

1. Display Technologies & Development Projects constitute 35% of the Trefis price estimate for Corning's stock.
2. Optical Communications (Carrier Network, Enterprise Network) constitute 26% of the Trefis price estimate for Corning's stock.
3. Gorilla Glass & other Specialty Materials constitute 21% of the Trefis price estimate for Corning's stock.

WHAT HAS CHANGED?

1. Impact of Coronavirus On Corning's Stock

Corning stock lost more than 40% – dropping from $30 at the beginning of 2020 to below $18 in late March 2020, owing to the pandemic. It then spiked 2x to around $38 now (through Feb 21, 2021). That means it is well above the pre-pandemic levels.

Why? While the Covid-19 outbreak and associated lockdowns resulted in an uncertain outlook for the broader markets, the multi-billion-dollar Fed stimulus announced in late March helped the markets stage a strong recovery. Investors are now expecting a quicker economic rebound with economies opening up gradually, and vaccines in place, boding well for Corning. In addition, the company posted better than expected Q4 results, partly led by higher demand for televisions and laptops, driving Corning's glass volume higher.

2. Q4 2020 Earnings

Corning posted a better-than-expected performance in Q4 2020. The company reported sales of $3.4 billion, up 19% (y-o-y), reflecting sales growth primarily for Specialty Materials and Environment Technologies segments. Looking at the bottom line, the company's adjusted EPS grew 13% from $0.46 in Q4 2019 to $0.52 in Q4 2020.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key drivers of Corning's divisions that present opportunities for upside or downside to the current Trefis price estimate for Corning:

Corning's Display Technology Revenues: Corning's LCD revenues have fluctuated in recent years due to competitive pressure and acquisition of additional stake, and stood at $3.2 billion in 2018. This figure was stagnant at $3.25 billion in 2019 as a result of decline in glass prices. Going forward, we expect the figure to increase marginally. If however, Corning's display technology revenues were to cross $5 billion due to potential manufacturing cost advantage in a period of declining prices, better uptake of its LCD panels, and solid growth from Gen 10.5 glass it could lead to a potential upside of around 17% to our price estimate.

The company’s 3 smaller segments as mentioned above have all been growing faster than the underlying industries on account of a myriad of reasons like – Environmental Technologies growth was driven by the adoption of Corning’s proprietary gasoline particulate filter (GPF) innovation. Specialty Materials growth was led by adoption of industry-leading cover glass innovations despite smartphone unit sales being down 3% Life Sciences reached a $1 billion sales milestone, growing at nearly twice the rate of a strengthening market on account of newer applications especially in growth categories like cell culture and gene therapy.

BUSINESS SUMMARY

Corning is a global technology company that manufactures and processes a variety of products at approximately 108 plants in 15 countries. It makes money primarily through its joint ventures Samsung Corning and Dow Corning. Samsung Corning manufactures glass substrates for active-matrix liquid crystal displays (LCDs) which are primarily used in notebook computers, flat panel desktop monitors and LCD televisions. Dow Corning which manufactures silicone products. Corning's other business segments include environmental technologies, life sciences, and telecommunications.

SOURCES OF VALUE

The display technologies business is the largest contributor to Corning's value.

Corning's expertise in glass substrate manufacturing

Corning's Display Technologies segment accounts for nearly 29% of the company's revenue and close to 30% of its EBITDA. Its proprietary fusion-based process produces high-quality glass substrates which are highly uniform, clean, light-weight and thin, which are important qualities required for manufacturing LCD screens. The process enables Corning to produce large-sized substrates in a cost-effective manner.

Innovative products help maintain market leadership

Corning continually invests in R&D to develop innovative products to cater to the demands of LCD panel manufacturers. Corning recently launched Iris glass, which could help replace light guide plates in LCD TVs and make them slimmer and lighter. It also launched a new project named Gorilla Glass SR+, its latest version of Gorilla Glass, which is more scratch-resistant than a sapphire-based cover glass and stronger than Gorilla Glass 5.

100% ownership of Samsung Corning Precision complements Corning's display business

Samsung Corning Precision (SCP) offers glass substrates for active matrix liquid crystal displays (LCD). As Corning has acquired a 100% stake, it could leverage its marketing and distribution reach to expand the business outside South Korea. Corning could also use excess capacity at SCP to manufacture other products such as Gorilla Glass.

KEY TRENDS

LCD prices are declining

Glass manufacturing is a commoditized business where prices are determined solely by factors of supply and demand. Innovations in LCD technology and manufacturing overcapacity are putting downward pressure on LCD prices. However, the price decline in 2019 stemmed to mid-single-digit and the company expects the pricing environment to improve in the near term. As a result, strong demand from emerging markets coupled with growth in TV screen size and ramp up of Gen 10.5 plant should aid this recovery.

Growth in consumer demand for LCD in emerging markets

Notebook, tablet PC, and LCD television penetration remain low in most emerging markets and developing nations. We expect this demand to increase and drive the growth in global LCD shipments.

Demand for large sized displays

Consumers prefer larger displays on their TVs, notebooks, tablets and mobile phones because of the enhanced viewing pleasure. This may drive an increase in demand for LCD glass and thereby increase shipments. The demand for large screen LCD TVs is also likely to be driven by new technologies such as Ultra HD, 4K, and 8K, which provide enhanced viewing pleasure on large screen sizes.

High replacement rate for LCD in developed markets

The replacement rate for tablets, notebook PCs, and LCD televisions remains high in developed markets. This is expected to create demand for LCD panels and hence increase the total number of shipments.

Investment in new technologies for maintaining competitive advantage

Corning believes it has sustained its competitive advantages in LCD glass substrate products by investing in new technologies. This is likely to continue and could keep costs high.

Stringent emission standards drive demand for better filters

To ensure compliance with emission standards, automobile manufacturers resort to the use of emission control systems. As these standards get even stricter, automobile manufacturers have to upgrade to newer and effective emission control systems in order to remain compliant. This has a positive impact on the automotive exhaust systems market, which includes manufacturers of automotive substrates and filters.