Shareholders in Corning Inc (GLW -0.03%) have had quite the ride this past year. Shares in the specialty glass manufacturer have taken off and are now up more than 53% over the past year, and up 18% year to date. This trend continued last month when Corning reported its 2017 first quarter earnings. Once again, investors in the company had plenty of reason to celebrate.
The company's core sales were reported as $2.485 billion, a 14% gain year over year. Earnings per share, powered by copious amounts of buybacks, were up almost 40% year over year. Four out of five of the company's divisions had core earnings increase by double-digit percentages over last year's first quarter.
Although it was the across-the-board success that drove shares up, long-term investors should be most excited over the two Corning divisions that produced the lion's share of the growth. Specifically, Corning's Optical Communications division, which manufactures and sells fiber-optic solutions, and Corning's Specialty Materials, the operation responsible for making Gorilla Glass, both saw sales jump more than 30% year over year.
Supplying the backbone for the world's connectivity
You might not know this but, in 1970, Corning scientists invented the first low-loss optical fiber for commercial use. These days, the Optical Communications division at Corning is the company's second-largest and reported $818 million in sales and $93 million in first quarter earnings. Indicative of the segment's heady growth in recent quarters, and just days before Corning reported earnings, Verizon Communications Inc (VZ -0.53%) announced a $1 billion, three year deal for Corning to supply Verizon with optical fiber.
Corning will supply Verizon with 20 million kilometers of optical fiber through 2020. Image source: Corning Inc.
During the quarter's conference call, Corning CEO Wendell Weeks discussed the deal and other opportunities the company's leadership saw in this space. From the S&P Capital IQ transcript, Weeks stated:
Verizon's announcement last week is a great example. The agreement commits Verizon to purchase a minimum of $1 billion of our optical solutions over the next 3 years as they reinvent their network to support 5G and new services. We will supply them with up to 20 million kilometers of optical fiber, annually.
...all of our customers have the opportunity to benefit from our unique set of capabilities in Optical Communications. We are engaged in deep dialogue with major telecom players across the globe as they anticipate transformations in communications, education, healthcare, transportation, and ultimately, the way that we all live.
Weeks continued that the company expects to grow this segment "significantly faster" than the overall optical fiber market. CFO Tony Tripeny guided for the segment to grow in the low-teen percentages for the rest of the year but noted that the company's capacity for making more is strained. Weeks later added, "If we had more, we could sell more." Corning plans to meet this incredible demand for more product by investing in additional capacity which is factored into the company's four-year capital expenditure plans of $6-7 billion.
Given the world's seemingly insatiable demand for connectivity and data, Corning might be as well positioned as any company for growth in this important market. And, with 5G apparently right around the corner, Corning seems destined to be a winner in that space as well.
The $300 million Gorilla in the room
Corning's Specialty Materials segment was the company's other fast grower in the quarter. This segment manufactures Gorilla glass, the tough specialty glass used to protect our smartphones and other mobile devices. The company's ambitious goal for this segment is to double sales despite smartphone saturation.
Management plans to do this by ensuring Gorilla Glass remains the best-in-class for protection from drops and scratches. By providing ever-improving protection, the glass can be used in a wide variety of products. For instance, Weeks noted, several leading Chinese smartphones and the newly released Samsung Galaxy S8 use Gorilla Glass 5 on the front and back of their phones. Better quality and improved features of the glass will also enable it to be increasingly used on new products. According to Weeks, the Gorilla Glass SR+, won the design for Samsung's Gear 3 smartwatch due to its superior impact and scratch ratings.
If anything, Gorilla Glass 5 has only increased Corning's dominance in this category. CFO Tripeny stated that the adoption of the latest Gorilla glass iteration has been "significant" and "better than what we've seen in other versions of Gorilla Glass that we've introduced." Tripeny guided for a high-teen year over year percentage growth for the segment in the upcoming quarter.
Just a couple of years ago, Corning's conference calls were dominated by questions on foreign currency hedging and glass price declines. While Corning remains a diversified business, it is also poised to benefit from two huge secular trends like few other companies are. With a price-to-earnings ratio below 20 (based on core earnings), a management team committed to returning capital to shareholders, and the majority of its divisions sporting double-digit percentage growth, this might be a company for investors to take a second look at.
