Taking it from the top
Gorilla Glass has been around for decades, but only took off after 2007 when its properties made it ideal for touch-sensitive smartphones. As of a year ago (about five years into its adoption), Gorilla Glass could be found on about 200 million -- or about 20% -- of the world's mobile devices. That number may have increased of late, as some of Corning's major partners include HTC, Samsung, Motorola, and Nokia
Despite diminishing earnings since the start of 2011, Corning's growth has been respectable. But it's those diminishing earnings that are worrying investors. Much of Corning's revenue still comes from its Display Technologies segment, which makes glass for flat-panel displays. Gorilla Glass is part of its Specialty Materials segment. Let's see how the various parts of Corning performed over the last two years, to better understand the path it's likely to take.
2011 Net Income
2010 Net Income
|Display Technologies||$2,349 million||$2,993 million||(22%)|
|Telecommunications||$195 million||$98 million||99%|
|Environmental Technologies||$121 million||$43 million||181%|
|Specialty Materials||($36 million)||($32 million)||NM|
|Life Sciences||$61 million||$60 million||NM|
|Total||$2,690 million||$3,162 million||(15%)|
Source: Corning 2011 10-K filing. NM = not meaningful.
A look from all angles
The specialty materials section wasn't profitable in 2009, either. Total sales have increased markedly, from $331 million in 2009 to $578 million in 2010, and then to just over $1 billion in 2011. Gorilla Glass is cited as a major factor in not having larger losses, but that's not particularly compelling. Despite net sales that amounted to a third of those at Corning's flagship display tech segment, the Gorilla Glass-backed specialty materials segment is far from reaching the same high level of profit.
Gorilla Glass and its successor will need to deliver a high profit margin to make up for display technologies' expected decline. But Corning reduced Gorilla Glass production capacity by 25% last year despite the exploding revenue stream. This streamlining might make for better margins in the short term, but smartphone sales are exploding, with 1.5 billion handset sales projected by 2016. Is Corning throwing in the towel too early, or can its existing facilities keep pace with this growth?
Consider that if display technologies' profit declines by "double digits" as management expects, Corning's other segments will need to pick up over $200 million in slack next year -- assuming that "double digits" means the very lowest double digits possible. Stretching similar drops in profit out to 2016 reduces Corning's profit by a billion dollars annually from what it was last year. Yet despite impressive revenue growth rates in the specialty materials segment, Trefis projects margins to remain low beyond 2016.
Corning is cheap today, but that might evaporate if display glass profit can't be made up elsewhere. It's not enough to churn out more revenue if there's no boost to the bottom line.
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