Corning's Glass Challenges Intensifying

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Corning (NYSE: GLW  ) is under pressure, falling 6.7% after revenue and earnings that beat expectations, but sales dropped 2% from the prior year. Revenue of $2 billion was ahead of a consensus estimate of $1.93 billion, and earnings per share of $0.29 were $0.02 ahead of the $0.27 consensus. However, even though the numbers looked good, underlying fundamentals were weak and have the potential to weaken further in the coming year.

Corning's share price has kept within a range of $8-$28 over the last decade, with periods of fits and starts. Its glass business has latched onto two high-growth technologies, the adoption of large screen televisions and the use of Gorilla Glass in mobile phones. But, these two themes seem to have run their course, leaving shareholders wondering what's next.

Gorilla Glass is a remarkable product that has protected electronic device touch screens over the last year. As companies developed touch-based devices, sales increased dramatically and channels were being filled. But, since the winners and losers have separated, demand has slacked off. Management highlighted touch screen notebooks as an area of weakness and claimed demand in the handset market is holding firm.

Could Apple hurt Gorilla Glass?
This may be a false sense of security, however, since Apple (NASDAQ: AAPL  ) has already filed a patent with the USPTO for attaching Sapphire to other materials and signed a $578 million deal with GT Advanced Technologies (NASDAQOTH: GTATQ  ) . If Apple releases Sapphire-based devices in the near future, this has the potential to lead to another leg down for profitability in Corning's specialty materials business.

While Corning provides Gorilla Glass for its partners, GT Advanced Technologies provides the furnaces and methodology to produce the sapphire glass. To date, the price difference has been enough to keep cost-conscious handset vendors away from Sapphire, but GT Advanced Technologies has discovered a way to cut layers of Sapphire so thin that they can act as a laminate, providing a protective coating that's one step away from the hardness of a diamond. This may be away for sapphire to close the gap with the price/performance of Gorilla Glass. Since Apple has been vocal about keeping margins high by producing the best possible products, it appears willing to accept the higher cost of sapphire, which has been estimated to cost 10 times as much as Gorilla Glass.  

Another weakness for Corning?
The LCD market is the other point of weakness for Corning. The company is expecting prices to drop in the first calendar quarter and believes the glass used per screen could approach 10% in 2014, the same as it did in 2013. When this issue first arose, the tone did not sound confident and seems to be a stretch.

There was one bright spot in the quarter as optical sales grew 12%, but the mix shift toward lower-margin products created a severe profit drag, which caused business line profits to decrease 18% from the prior year. Going forward, Corning expects this business to be up in the mid-teens, but there was no discussion about future improvements in profitability.

Corning has been around for over 160 years and has five lines of business. Any company that has survived this long has gone through its fits and starts, and Corning seems to be heading into a period of challenges. The company is hosting an analyst day on Feb. 7 and may offer insights into either new growth opportunities or operating expense reductions. But, with the information that's available, from an investing perspective, there appear to be better opportunities in the technology sector. While shares are trading at $17, the company is cheap on a price-to-earnings basis at 11 times, as long as estimates do not need to be revised downward.  

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David Eller

I started contributing to the Motley Fool in 2013. I have held research positions at two investment banks and two hedge funds before trying more entrepreneurial ventures. I'm passionate about helping people find freedom in financial independence. Feel free to add comments and start a discussion. I hope to use these articles as forums to learn from you as well as share my opinion.

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9/3/2015 4:00 PM
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