Shares in material science company Corning (NYSE: GLW) rose nearly 15% in the week to Friday morning. The move comes after a very well-received set of fourth-quarter earnings released midweek.
There's never been any doubt that Corning is a growth business. Its glass and ceramics are used across many industries and are likely to grow in 2022. From 5G networking spending to television panels, mobile phone displays, and an improving outlook for semiconductors and automotive, Corning's end markets are in growth mode. Indeed, fourth-quarter core sales grew 12%, and full-year sales increased 23%. Moreover, management's guidance for 2022 calls for a 6.5% increase in sales to $15 billion.
Sales growth is not the issue at Corning. Instead, the debate around the stock centers on its margins. Is its gross margin in a long-term decline due to competitive pressures on pricing? Will its operating margin also be pressured by the need for substantive research & development spending? What about its hefty capital spending requirements eating into its cash flow?
In fact, gross margin and operating margin declined in the fourth quarter from the same period of last year.
That said, during the earnings call, Senior Vice President Ed Schlesinger told investors: "In the near term, improving gross margin is my top priority. We expect improvement throughout 2022 as sales grow and our pricing actions take hold." In a nutshell, according to CEO Wendell Weeks, "Over the last several months, we have negotiated with customers to increase prices in our long-term contracts to more appropriately share the increased cost we are experiencing."
The pricing increases will take some time to show through, as CFO Tony Tripeny told investors that some of it would "start kicking in, in Q1 and then accelerate from there," so investors will have to be patient.
However, a combination of price increases, internal cost cuts, and volume increases will hopefully lead to the kind of gross margin expansion that management believes it will achieve in 2022.
Simply put, Corning needs to execute. The growth opportunity is there in 2022, but it's generally an inflationary environment, and Corning needs to pass those costs on to its customers and increase margins. If the price increases can stick, long-term investors might start positively revaluing the company. That would be good news.
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