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Here at the Lab, we initiated coverage on Corning Incorporated (NYSE:GLW) with a valuation of $35 per share, emphasizing how the company’s negative stock price performance was due to management’s Q4 outlook rather than the actual Q3 results. The CEO was guiding for lower revenue growth in 2022 last quarter and a decline in top-line sales in the Optical Communications division. Despite that, our internal team, after carefully analyzing Corning’s track record, noted the following key takeaways:
- The company achieved turnover growth even in a declining market – i.e., smartphone CAGR in the 2016 and 2021 range, cell phones decreased by 2%, whereas Corning’s display segment rose by 12%;
- The same positive trend was achieved in the automobile division thanks to a better product MIX and gaining market share in new content per vehicle that reached $100 versus the past at $50;
- We very much liked the new strategic plan called “More Corning“. In detail, the American multinational technology company that specializes in specialty glass will leverage its intellectual property (IP) portfolio and expected synergies to support its long-term profitability. Indeed, the glass leader is focusing on 1) a common manufacturing process and 2) a shared sales platform. These new initiatives will enhance the company’s profitability.
Today, we decided to upgrade our rating from a neutral valuation to an outperform at $40 per share. We are maintaining our 13x price-earning target (compared to the average 2019-2021 range of 16 times), but we estimate a change in our 2024 EPS from $2.90 to $3.07 per share for several positive catalysts that we expect in 2023, leading to a significant increase in our revenue forecast. Why?
In the Optical Communications segment, we see multi-year support from US Government funding. First of all, we should report that this division grew at a double-digit rate in the last seven quarters, and even if the Q4 forecast isn’t great given installations carrier time, our internal team is forecasting a 2023 acceleration thanks to the US broadband program to allocate approximately $65 billion in network and cloud demand. This is a key supportive catalyst in our outperforming rating and is also combined with the Affordable Connectivity Program to improve access to high-internet quality. In number, the company’s Optical business (34% of revenue and 29% of net income) should return to top-line sales growth based on an air pocket in Q4 last quarter.
In addition, we see several tailwinds, including the panel production recovery (also thanks to the US Government funding support towards solar-based internal production and semiconductor production). Here at the Lab, we are confident that Corning will leverage Hemlock to profit from the strong consumer demand and related government B2C subsidies. Aside from the external funding, we expect support from TV Panel production. In 2022, panel makers reached a 14-year low in September with production that decreased by 28% in the third quarter; however, we believe that the division will return to growth starting from the 2023 second quarter.
Another supportive point will be the Chinese reopening. Turnover from China stood at 32% in 2021, and we believe that 2022 topline growth was heavily impacted by COVID-19 outbreaks, given production challenges and several lockdowns. Aside from the reopening, the Chinese government’s new stimulus package will accelerate Corning’s revenue in 2023. A change in health regulatory policy with a “sudden reversal of China’s long-standing zero-Covid policy means the country is reopening more swiftly than expected” Goldman Sachs says in the last strategist note. We should also note favorable support from the yen weakening. Wall Street analysts were concerned about FX evolution and related margin impact. Given the new FX hedges for 2024, we are now less worried about currency development.
Despite China’s reopening, the supply chain is clearly improving. We are again lowering logistic costs. Based on various conversations with B2B companies and cross-checking our universe coverage, we conclude that supply lead time has shortened, and we are entering a new normal phase (with no inventory shortage). This also, combined with auto and semis production challenges, limited Corning’s revenue in 2022 and will create an upward result for 2023. Cross-checking STM auto estimates, we are very much confident in an increase in vehicle production. The company’s Display segment (23% of revenue and 36% of net income) was under pressure due to weaker demand from China, right now we are estimating a return of double-digit growth.
All in all, we think that there is a growth bias around Corning’s top-line for 2023, given the macro headwinds that happened in 2022. “More Corning Strategy” and our macro takeaways will support Corning’s valuation (already heavily discounted on a P/E basis). Aside from the risks emphasized in our initiation of coverage, we also included lower glass prices and a slower 5G rollout.
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