Is Corning Incorporated Stock a Purchase?

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Materials science company Corning‘s (NYSE: GLW) sales exploded in the fourth quarter and the company is set to have a very strong year. The company has a lot of great things going on right now, but does it all add up to make the stock a buy? Let’s take a closer look.

End markets resolutely recovering

The table below shows the progress of Corning’s sales recovery in the second half of 2020. The company also has many positive sales drivers to lead to 2021 and beyond. If it is not the 5G network expense, it is the use of Gorilla Glass and Corning ceramics in the cellphones of Samsung and Apple. If it is not the production of large-sized television panels, it is the sales of gasoline filters.

Activity area

Annual sales 2020

Fourth quarter year-on-year change

Third quarter change year-on-year

Activity

Remarks

Display technologies

$ 3.17 billion

6%

4%

OLED and LCD screens for TVs, laptops and monitors

Transfer of production of large-size television panels to Corning’s large factories in China

Optical communications

$ 3.56 billion

8%

(ten%)

Fiber optic and cable for networking

5G spending

Environmental technologies

$ 1.37 billion

19%

(5%)

Ceramics and materials used in emission control

Regulatory pressure on car manufacturers to adopt environmentally friendly technology

Specialty materials

$ 1.88 billion

20%

23%

Glass and materials used in smartphones, semiconductors, tablets, aerospace, defense and other industrial applications

Use of tough glass in cell phones

Life sciences

$ 998 million

7%

(13%)

Ships and equipment for life sciences

Technology that helps customers create vaccines and therapies for COVID-19

Total

$ 11.45 billion

17%

2%

N / A

N / A

Data source: Corning presentations, author’s analysis. YOY = year after year.

Put simply, Corning has many sales and earnings drivers in 2021, and Wall Street expects its sales to grow 13.8% in 2021 before slowing to 5.2% growth in 2022. During This time, earnings per share (EPS) is expected to follow suit, dropping from $ 1.39 in 2020 to $ 1.96 in 2021 and $ 2.19 in 2022. Likewise, free movement of capital is expected to grow from $ 948 million in 2020 to $ 1.4 billion in 2021, and then to $ 1.55 billion in 2022.

Together, these numbers demonstrate that Corning is trading at very attractive 2022 valuations, and it’s hard not to say that the company looks like good value.

However, I will try.

Corning metric

2020

2021 Est.

2022 Est.

P / E ratio

27x

19.1x

17.1x

Free cash flow price

30.2x

20.5x

18.5x

Data source: Yahoo! Finance, author’s analysis.

The key number to focus on

Corning’s big concern is not its end markets or even its ability to increase sales. It is rather a question of maintaining its profit margin in the face of growing competition from production from emerging countries such as China and India. The question boils down to his Gross margin – in other words, the profit that remains after the full cost of the goods is removed.

If an industry has rising gross profit margins, it is a good sign that the companies that make it up have good pricing power, while if the margins are falling, it is a sign of intense competition on the market. the costs. With that in mind, let’s take a look at the evolution of Corning’s gross margins alongside some of its major competitors, as named in its annual 10-K filing with the SEC. (In case you were wondering, in the table below AGC means Asahi Glass Company.)

Unfortunately, it looks like Corning’s industry-leading gross margins are under pressure in the long run.

Data by YCharts

However, the current pricing conditions appear to be favorable. Discuss the question on the recent earnings call, CFO Tony Tripeny sees the narrowness of glass supply leading to a favorable “supply / demand dynamic” from which “we are living in a very favorable price environment”.

Smartphone glass.

Image source: Getty Images.

Tripeny went on to describe expectations that the pricing environment would remain favorable for at least the next “several quarters” due to a combination of supply chain issues in the industry, profitability issues to which competitors face in the current pricing environment, and because “display glass manufacturing requires periodic investments in existing capacity to maintain operations.” So don’t be surprised if the gross margin increases over the next few quarters.

And after?

There can be no assurance that the pricing environment will remain favorable. Once competitors resolve their supply chain issues and invest in expanding capacity, pricing pressure could resume and eat into Corning’s profits. If you forgive the pun, the outlook is great for Corning in 2021, but investors need to be cautious about its long-term outlook.

This article represents the opinion of the author (s), who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.


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