The stock price of Corning (NYSE:GLW) suffered last year as the glass maker made heavy investments in its manufacturing capacity to meet the rising demand for its products. Operating in a growing market and serving eager customers is always a good thing, but investors can sometimes scare easily, wary of companies that must spend now to earn more later. As it looks right now, though, the investments seem to be paying off. When the glass maker reported its 2018 fourth-quarter earnings last month, shares rocketed higher and are now up more than 10% year to date. A quick glance at the company's quarter reveals what has investors so excited.
In Q4, Corning's sales grew to $3.1 billion, a 15% increase year over year, while core earnings per share rose to $0.59, a 28% increase year over year. The strong top- and bottom-line growth was driven by an increase in sales in all five of Corning's business segments, and its core gross margin improved. CFO Tony Tripeny summed it up: "In 2018, we did what we said we were going to do, which was to expand our manufacturing capacity in the first half and begin leveraging those growth investments in the second half."
Can the company continue this momentum through 2019 and beyond? Here are three reasons why I believe it can.
Optical fiber sales outperformance
By sales, Corning's largest business division is optical communications, which manufactures optical-fiber solutions for telecom networks, data centers, and other enterprise customers. In Q4, optical communications sales and earnings rose 26% and 67%, respectively, over last year's fourth quarter. One of the primary drivers of this division's success is the upcoming wireless-network upgrade to 5G, which will lead to more interconnected devices than ever before. With wireless data consumption set to increase, we will need optical fiber-dense networks to support and transport that data.
In the company's fourth-quarter conference call, CEO Wendell Weeks reinforced this point:
Important trends such as 5G, smart cars, connected homes, and augmented reality are converging around Corning's unique capabilities. These interconnected ecosystems require technologies that have been our fundamental strengths for decades. Our propriety manufacturing processes and deep expertise in glass, ceramics, and optical physics are more relevant than ever.
It should be noted, however, that Corning's optical communications division is growing, as one analyst put it, "a lot faster" than the overall market. Weeks credited this to a few factors, namely that copper is being replaced in older networks that need to be upgraded in order to support increased data demands and the "unique innovations" that Corning offers in this arena. These innovations include software solutions that significantly speed up the installation process. Weeks also announced that Corning had already secured multiyear contracts from industry leaders "which will add significant sales and profits in 2019 and beyond."
The $400 million Gorilla in the room
Another reason to be bullish on Corning is that sales of Gorilla Glass continue to rise, even in a fully saturated smartphone market. In other words, even though smartphone unit sales have been roughly flat since 2016, Gorilla Glass sales have increased approximately 30% in that time. There are two primary reasons for this.
First, more Gorilla Glass is appearing on each phone. In 2017, about 15% of smartphones used glass for the back of the device. In 2018, that number rose to 30% and Weeks expects glass-back penetration in the smartphone market to continue to grow. The company also announced a partnership with OtterBox, the best-selling smartphone case brand in the U.S., to make smartphone glass-screen protectors.
Second, Gorilla Glass is starting to branch out from materializing on just smartphones. In the conference call, Weeks made it a point to highlight the different devices that were now using Gorilla Glass, including wearables (e.g., smartwatches), augmented reality and holographic displays, and even 3D sensing technologies.
Racing to victory
With each passing quarter, more and more Corning products are used in automobiles. Gorilla Glass has now won a place on 55 different automotive platforms for interior displays. Also making products used in cars is one of Corning's least-followed business segments, environmental technologies.
This division, according to the company's annual 10-K filing with the SEC, "manufactures ceramic substrates and filter products for emissions control in mobile applications around the world." As Weeks pointed out on the conference call, "Our gasoline particulate filter technology makes cars significantly cleaner."
In Q4, sales in environmental technologies rose 10% to $319 million. New environmental regulations in different geographic markets appear to be acting as a catalyst for much of these sales. In 2018, Corning saw more than $50 million in gas particulate filter (GPF) sales, and in 2019, the company expects to see this figure increase to $150 million. This growth is largely coming from Europe, where new emission regulations are being rolled out. In 2020, GPF sales are expected to launch in China when the world's most populous country is scheduled to introduce emission-control regulations.
Many of Corning's end-user markets are not growing. Wireless networks already cover the globe. The world is not expected to see a significant increase in smartphone sales in the coming years. Car sales are not expected to explode anytime soon.
What is expected to grow is the amount of Corning material in each of these applications. More-robust wireless networks, sleeker and stronger smartphones, more devices with glass displays, and cleaner cars all require specialized and technically difficult-to-make glass components. The demand for Corning's expertise does not look like it will abate any time soon. In fact, it might be a good time to ask whether your portfolio has a place for such a company. Mine already does.