Shares of Corning (NYSE:GLW) surged 11% on July 25 after the specialty components maker posted solid second quarter numbers. Its revenue rose 10% year-over-year to $2.7 billion, beating estimates by $60 million and marking the company's strongest growth in five quarters. Corning's core sales -- which exclude currency impacts and one-time gains or charges -- rose 9% to $2.8 billion. Both its reported and core sales rose 10% sequentially.

Corning's net income surged 68% to $738 million, but that figure was inflated by currency hedging contracts. Core net income, which excludes those gains, fell 10% against the second quarter of 2017, to $359 million. Core earnings per share (EPS), which were buoyed by share buybacks, dipped 3% to $0.38 per share, topping expectations by a penny. On a sequential basis, Corning's core net income and core EPS rose 20% and 23%, respectively.

A spool of optical cables.

Image source: Corning.

Corning also raised its full-year sales guidance from $11 billion to $11.3 billion, which implies 10% year-over-year growth. During the company's earnings conference call, CFO Tony Tripeny stated that Corning's sales and profitability would "improve significantly" in the third quarter. Let's dig deeper into Corning's second quarter numbers to see why this underappreciated stock could climb higher throughout the rest of 2018.

The key numbers

Corning generates its revenue from five key businesses: Optical Communications, which sells fiber optic components; Display Technologies, which manufactures glass panels for LCD screens; Specialty Materials, which sells Gorilla Glass; Environmental Technologies, which offers products like emission filters for cars; and Life Sciences, which focuses on labware products like flasks and tubes. Here's how these businesses fared during the second quarter:

Unit

Q2 2018 Revenue

Year-over-year growth

Optical Communications

$1.02 billion

16%

Display Technologies

$780 million

0%

Specialty Materials

$343 million

2%

Environmental Technologies

$317 million

21%

Life Sciences

$245 million

11%

Source: Corning second-quarter 2018 earnings report.

The Optical Communications unit's 16% sales growth over Q2 2017 marked a significant acceleration from its 8% growth in the first quarter. This indicates that demand for optical components, which waned last year due to slower carrier upgrades, is rising again on 5G and data center upgrades.

Corning's recent acquisition of 3M's (NYSE: MMM) optical unit, which is expected to add $200 million to its full-year sales, also boosted the unit's growth. Corning hiked its full-year sales guidance for the Optical unit from 10% growth to the high teens. Management also reiterated the segment's long-term goal of generating $5 billion in optical sales by 2020.

The Display Technologies unit's flat growth seems unimpressive, but it improved significantly from a span of negative growth over the past five quarters. This indicates that LCD prices may be finally bottoming out.

During the second-quarter conference call, CEO Wendell Weeks stated that the unit saw "the most favorable pricing environment for LCD glass in more than a decade," and that annual price declines could drop "to a mid-single-digit percentage in the third quarter."

Two Corning employees test a sheet of Gorilla Glass.

Image source: Corning.

The Specialty Materials unit was Corning's strongest business in previous quarters, but a lack of major smartphone launches throttled its recent growth. However, Corning expects demand to accelerate in the second half of the year as new devices -- like Apple's (NASDAQ:AAPL) new iPhones -- hit the market. Corning also expects to double its sales in the mobile consumer electronics market "over the next several years."

Apple has used Gorilla Glass since the first iPhone debuted, and the company is expected to install Corning's new Gorilla Glass 6 in this year's iPhones. In a vote of confidence for its longtime partner, Apple awarded Corning $200 million from its Advanced Manufacturing Fund for US companies last May. Corning is also producing new versions of Gorilla Glass for wearables and cars.

Lastly, Corning's Environmental Tech and Life Sciences units remain consistent growth engines. Higher emissions standards for vehicles are boosting sales of Environmental Tech's particulate filters, and top pharmaceutical companies are placing bulk orders for Life Science's Valor Glass labware, which reduces contamination and cracks while boosting throughput. Corning hiked its full-year sales forecast for the Environmental Tech unit from 10% to the mid-teens.

Expanding margins and rising earnings

Corning expects its gross margin to expand from 39% in the first half of 2018 to 42% in the second half of the year. In previous quarters, Corning's operating margins were weighed down by investments in production capacity increases of its optical, display, and environmental units, as well as the development of new Gorilla Glass products.

However, Tripeny stated that those investments are "now yielding clear benefits" and that several of those largest projects have already reached an "inflection point." Analysts expect Corning's core EPS to stay nearly flat this year due to the company's higher operating expenses, but they also see its earnings rising 15% next year as recent investments pay off.

Based on this forecast, Corning trades at 17 times next year's earnings. Its dividend also yields 2.6% on a forward basis. Therefore, I believe that Corning's reasonable valuation, decent dividend, and many irons in the fire all make the stock a solid buy at these prices.

 

Leo Sun owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends 3M and Corning. The Motley Fool has a disclosure policy.