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Corning Built Growth Momentum In The Second Half Of 2016

The year 2016 was a mixed one for the American glass, ceramics, and other related products manufacturer Corning Inc. ( GLW ). However, Corning's stock price rose by more than 30% on the back of improved profits and revenue growth in almost all the segments after Q1'16. While the display technology segment improved due to decrease in panel prices, the optical communication business declined marginally due to a software implementation issue. Corning managed to overcome the weakness in heavy duty vehicle production in the U.S. and China through strong demand in cabling facilities and light duty auto products. It also completed the acquisition of Alliance Fibre Optics Inc. to expand its market access and enhance product sets in fiber-to-the-home and data center portfolios. We expect this acquisition to address the high expected demand for optical fiber products in the coming years. We believe that Corning will be able to navigate through short-term challenges and carry its momentum on the back of its recent project wins in the specialty materials environmental technology segment.

Corning's Net Income Grew In 2016 But Revenues Remained Flat

Corning's net income almost doubled in the first nine months of 2016 due to an increased benefit for income taxes, primarily because of rate differences on the income of Corning's non-U.S. entities. However, overall revenues remained flat, due to the mixed impact of its businesses. The strong performance of the Display Technology segment was offset by a decline in the Optical Communication segment due to software implementation issue in the first half of 2016. This manufacturing software interrupted Corning's cabling production and interfered with Corning's ability to fill customer orders. The issue was resolved in Q2'16 and optical communication has gained momentum afterward.

Display Technology revenues for 2016 (up to Q3'16) were up 2.1% from 2015 year to date, as expected. We expect a further recovery in this segment in Q4'16 as the demand tends to go up in the second half of the year. Additionally, Corning's competitors' profitability is already low and therefore we don't see a lot of room for further price decreases. Optical Communications segment faced a software implementation issue in Q1'16, which resulted in a slight decline in segment's revenues. Although specialty materials revenue is slightly down from last year as of Q3'16, it is expected to go up in the coming months because of new product launches such as Gorilla Glass 5 and Gorilla Glass SR+. Additionally, Corning won the majority of platforms awarded to date for vehicles with GPFs (gas particulate filters) to meet the Euro VI regulation, which is likely to begin ramping in 2017.

Corning Overcame The Downturn In The Environmental Technology Industry

We expected Environmental Technology sales to decline due to the significant downturn in the production of heavy-duty vehicles both in the U.S.and in the China, which accounted for about 50% of Corning's overall sales in 2015. This segment produces ceramic and other filters used in emmissions control systems. However, its impact in the first half of 2016 was offset by strong demand in cabling facilities and light duty auto products and Corning's Environmental Technology sales decline by Q3'16 stands just at just 1.5%.

Both Mercedes-Benz and Volkswagen recently announced that they will equip vehicles with particulate gas filters starting 2017 and as a result, Corning won several new GPF platforms in Q2'16. This will which enables car manufacturers to follow the stricter pollution regulations. Clrning's sales into the atuomotive market are set to grow in the next few quarters by virtue of its new product 'Gorilla Glass Auto', which it is selling to automakers for windshileds.

We will follow up this analysis with the expectations for 2017, and how our valuation fits into these expectations. Meanwhile, please feel free to share your views by commenting in the box below.


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2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis of Corning

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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