Corning: What To Expect From Q4 2015 Earnings

Corning (NYSE:GLW) is set to announce its Q4 2015 results on January 26th. In Q3 2015, the company saw a broader revenue decline of nearly 11%, primarily driven by weakness in Specialty Materials, Display Technology and Environmental Technology segments. We expect the trends that were visible in its Q3 results to spill over to Q4 as well. This can primarily be attributed to weaker macroeconomic environment in China and the devaluation of Chinese Yuan, which has driven up the prices of the country’s imports. LCD prices are expected to decline owing to excess capacity and softer demand in China. We expect currency headwinds to impact almost all divisions negatively because of the strengthening of the U.S. dollar. Despite these factors, we are still bullish about the company given its strength in optical communication whereby it has successfully managed to create synergies and benefits by combining glass science and optical physics. We expect Corning to continue to come up with unique products that position the company as the market leader in each individual segment. One such product is the company’s Gorilla Glass, which had very strong   sales in Q3.  The company’s newest gorilla glass product, Gorilla Glass 4, continued to generate strong orders as the result of a very encouraging adoption rate for this product. Also, a JV between the company and Saint Gobain holds great promise with the rolling out of lightweight automotive glazing solutions, which will aid the overall revenue growth in the near term.

See our complete analysis of Corning here

Display Technology Revenues Will Suffer From Continued Economic Weakness In China & Japan

Display technology revenue fell nearly 11% in Q3 2015, compared to the same quarter a year ago. This can be attributed to the depreciation of the Japanese Yen, as the company has a significant exposure to the country.  There was also a moderate price decline in LCD glass pricing because of weaker macroeconomic conditions and a softer retail environment mainly in China. The decline was also due to a contract dispute with one of its largest customers, one that has since been sorted out.

However, we expect this revenue decline to continue because of quantitative easing policy of Bank of Japan, as the United States follows a policy of interest rate tightening (the contradictory monetary policies could prolong the divergence between Yen and USD. Also, China’s GDP growth for 2015 stood at 6.5%, below its expected rate. We expect the economic situation in China to remain subdued and impact Corning’s results.

Optical Communications Business Could Do Well

Unlike other segments, Corning’s Optical Communications revenues jumped 7% in the previous quarter, due to growth in both carrier network and enterprise network products. Much of this can be attributed to organic growth in North America, partially offset by weakness in Europe. We expect this trend to continue as the company reports its fourth quarter results, despite currency headwinds in Europe. We expect the growth in Internet traffic driven by higher online video content, an increase in the number of Internet-enabled mobile devices and growth in cloud computing services to aid demand for Corning’s Optical Communications business. Corning has reinvented optical fiber multiple times, achieving cost advantages and a marked increase in performance. We remain confident that it can continue to do so in the near future.

Slower Automotive Production In China To Impact Corning Sales

Sales of automotive light duty substrates declined in the previous quarter, primarily due to lower sales in China and the negative currency effects.  It was partially offset by higher volume in North America and Europe. Sales of diesel products also declined primarily because of lower sales of light duty diesel products and also because of the Euro depreciating against the dollar. Also, China’s auto and heavy-duty truck production has slowed through the year. China’s auto production is now expected to be flat year over year. In fact, production of heavy duty trucks has decreased by 34%. Going forward we expect Chinese GDP to exhibit declining trends and that in turn will impact the sale of automotive substrate products manufactured by Corning. We also expect currency headwinds to have a negative impact on the net sales of Corning.

Gorilla Glass To Be Boosted With New Joint Venture

Corning’s Gorilla Glass sales had a very strong  Q3 and we believe the strength continued through yearend. More recently, the company announced a joint venture with Saint Gobain to develop and manufacture lightweight automotive glazing solutions, which is a net positive for the stock. This new venture has been set up with the objective of combining Corning’s Gorilla Glass capabilities with Saint Gobain’s framing and sealing technologies to come up with a significantly improved mix of lightness and toughness. The solution is going to help reduce vehicle weight which will help boost fuel efficiency and reduce the detrimental effect on the environment.

Overall, we expect the company-wide revenue to decline from $9.72 billion in 2014 to $9.42 billion from in 2015. We also project GAAP diluted EPS to drop from $1.73 to $1.10 per share from 2014 to 2015 and then gradually increase to $1.60 per share by 2021. We currently have a price estimate of $20 for Corning’s shares, which is more than 15% ahead of the current market price of $17.

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