Corning (NYSE:GLW) had a tough year last year when in spite of an increase in revenues, the company’s profitability took a hit as overcapacity led to downward spiraling of glass spot prices. In Wednesday’s earnings, we expect the company’s revenues to have stayed flat though profitability could still face challenges given the industry conditions haven’t improved much. Corning principally competes with other glass manufacturers like Furukawa Electric (FUWAY:PK) and Sumitomo Electric Industries (SMTOY.PK). We currently have a $17 price estimate for Trefis, which is about 21% above the market price.
Gorilla Glass continues its domination
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Gorilla Glass has become the choice of almost all major smart phone manufacturers because of its thinness and ultra sensitive touch screen features. The glass sales almost tripled in the fourth quarter of last year and show no signs of slowing up. It has been further buoyed by the new version of this glass called Gorilla Glass 2 which has been released in the last quarter and is 20% thinner than Gorilla Glass 1. Microsoft has already placed a large order for this glass as it intends to use it in its new Windows PC computers.
Display glass prices continue to suffer
The oversupply in the glass market has led to a decline in prices which is expected to continue at least until the middle of the year. Corning has cut its capacity by 25% in a bid to eliminate some of this oversupply. Other manufacturers have also followed suit; however, these steps will take some time to have the desired effect and meanwhile, Corning will continue to face the brunt of falling prices.
Robust cost reduction by the company
Corning has been focusing on cutting intense and has been pretty successful until now. The company had set a target of reducing costs annually by 10% and has surpassed it by achieving a compounded annual depreciation of costs by almost 12% between 2004 and 2011. This trend is expected to have continued and positively impacted the profitability of Corning in the first quarter.
Falling profitability of Dow Corning
Dow Corning is the largest producer of silicone and polysilicon in the world with a unique technology and innovation set. It has consistently contributed to the company’s top and bottom line; however, we believe it is going through a difficult period as the cost of manufacturing silicon has increased due to climbing raw material prices while polysilicon spot prices have declined considerably due to oversupply in the market. This problem is expected to be have continued in the recent quarter leading to a steep decline in the profitability of Dow Corning.