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Corning Shines Despite Economic Headwinds

By Steve Symington - Oct 31, 2015 at 8:00AM

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The glass maker's massive new capital allocation program doesn't hurt, either.

Image source: Corning Incorporated.

Corning (GLW -0.81%) may have technically fallen short of analysts' earnings expectations for the first time in over a year. But this time, complementing the specialty glass maker's third-quarter results was an ambitious new $20 billion "strategic and capital allocation framework." Corning stock closed up 5.4% Wednesday as a result.

But before we delve deeper into that new capital framework, let's tackle the headline numbers.

Corning's third-quarter core net sales fell 5.1% year over year to $2.451 billion and translated to a 15% decline in core earnings to $447 million. Thanks to share repurchases over the last year -- including $827 million spent to buy back common stock in the third quarter -- that translated to a less severe 8% decline in core earnings per share to $0.34. Analysts, on average, expected Corning to achieve higher core revenue of $2.52 billion and core earnings of $0.35 per share.

"The weakening global economy, particularly in China, and the stronger U.S. dollar affected all of our businesses," explained Corning CFO Tony Tripeny. "We are pleased with the improving pricing environment for LCD glass, and the strong industry acceptance of Corning Gorilla Glass 4, which is growing faster than we anticipated."

Scratching beneath the surface
On one hand, the only segment to achieve year-over-year growth was once again Corning's optical communications segment, where revenue rose 7% to $747 million and core earnings increased slightly to $71 million. This growth came from a combination of fiber-to-the-home and data centers in North America, as well as the positive contributions of Corning's acquisitions of TR Manufacturing this past January, and Samsung Electronics' fiber optics business in March. Corning management also noted during the subsequent conference call that one large enterprise customer adjusted inventories during the quarter.

On the other hand, Corning's core display technologies segment saw sales fall 11% to $1.053 billion, thanks to a slight decrease in LCD glass volumes, and an expected continued moderation in LCD glass price declines. Display technologies' core earnings fell 15% to $257 million. With that mind, note Tripeny again reminded investors "the LCD glass pricing environment has been improving for more than a year."

Environmental technologies also saw sales decrease 9% to $257 million, as growth in North America and Europe was more than offset by soft demand in China. Environmental core earnings fell 33% to $38 million.

Similar to last quarter, life sciences continued to be dragged down by foreign exchange, causing revenue to decline around 1% to $211 million, and net income to fall 5% to $21 million. Note life sciences net income would have climbed in the mid-teen percentage range had it not been for the negative impact of currencies.

Meanwhile, core equity earnings from Dow Corning fell 22% to $53 million. And finally, despite the relative strength of Gorilla Glass 4 -- which has boosted average selling prices and enjoyed strong adoption from OEMs ahead of new product launches later this year -- specialty materials revenue fell 12% year over year to $288 million. For now, specialty material sales overall continue to be hurt by softness from semiconductor customers, which has resulted in a 20% year-to-date decline in advanced optics sales.

The way forward
Corning also offered some color on the fourth quarter. In display technologies, Q4 LCD glass volume should be down slightly on a sequential basis, and LCD glass price declines are expected to further moderate. Optical communications should increase in the low- to mid-single digit range over last year, and specialty materials should decrease in the low teens. Finally, both environmental and life sciences should decline in the mid-single digits from last year, and core equity earnings from Dow Corning should be roughly $80 million.

But this also raises the question: Why are investors seemingly shrugging off these broad declines?

First, it helps that shares of Corning were already down around 24% year to date going into Tuesday's close. And though economic headwinds were slightly more severe than expected in Q3, Corning management has been straightforward with investors about not only its near-term challenges but also its persistence in managing the company with a long-term focus.

Sure enough, Tripeny warned these global economic headwinds are expected to continue into the fourth quarter. But he also insisted Corning is "encouraged by longer-term industry trends."

That brings me to Corning's aforementioned new plans to deploy more than $20 billion in capital through 2019. This effort will be primarily funded through Corning's healthy operating cash flow and consist of two parts. First, returning over $10 billion to shareholders -- or almost half Corning's current market cap -- through share repurchases and dividend increases. And second, investing roughly $10 billion in the business through RD&E (research, development, and engineering), capital spending, and strategic mergers and acquisitions. Corning will share more details on exactly how it plans to distribute this $10 billion in the coming quarters.

In the meantime, Corning's board kicked things off by approving a $4 billion increase to its current share repurchase authorization, under which the company will execute an accelerated $1.25 billion repurchase. Corning also pledged to increase its dividend by at least 10% each year through 2019. 

For patient investors willing to let compounding do its work, this is excellent news. With shares now trading at just 12 times next year's expected earnings, it's no surprise the market drove up shares of Corning on the report.

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