Corning Earnings: Shares Still Attractive After Display Improves and Optical Takes a Step Back in Q2

We trim our fair value estimate for narrow-moat Corning GLW shares to $39, from $40, following second-quarter results that lead us to temper our near-term growth assumptions for its optical fiber sales. Overall, second-quarter results and third-quarter guidance missed our expectations, and we now expect more drawn-out recoveries for markets like optical. Still, we expect improvement through 2023 and into 2024. Corning’s display market appears to have rebounded from its bottom, and we believe the firm’s actions on pricing will drive up profits faster than sales. We continue to see upside in Corning shares, and believe long-term investors have a good entry point for a fundamentally strong firm.

Second-quarter sales dropped 10% year over year and missed our model by about 4%, but still rose 2% sequentially to $3.2 billion. Optical sales declined 19% year over year. Carrier and enterprise customers are reducing inventories built during pandemic-era demand, and we believe a tough interest rate environment is pausing or pushing out projects in the short term. The display segment crushed our expectations with 6% year-over-year growth behind upped panelmaker utilization. In Corning’s other markets, transportation sales remain healthy, but life sciences is struggling with lower COVID-19 demand and its own inventory reductions.

We credit pricing for strong margin expansion in the quarter, including 100 basis points of non-GAAP gross margin expansion up to 36%. We believe further effects from pricing are in the pipeline and we remind investors that volumes will also improve profitability against Corning’s high fixed-cost base.

Third-quarter guidance calls for sequential improvement to sales, with guidance implying GAAP sales around $3.3 billion. This is more muted than we had previously been expecting, primarily due to depressed optical expectations. Our long-term conviction in optical growth is unchanged; we just think spending will remain soft for a couple quarters.