Corning Earnings: Weak Short-Term Demand Lowers Our Valuation, but Shares Are Cheap

We lower our fair value estimate for shares of narrow-moat Corning GLW to $35, from $39, after management guided fourth-quarter results lower than our expectations. Corning’s reported results in the third quarter were weak, but within our expectations, as the firm continues to see softer demand for its optical fiber, which is its largest segment. We now expect this segment to stay at these depressed levels for at least two more quarters. On the bright side, we like Corning’s focus on improving profitability and cash flow while it waits for volumes to return. Despite our fair value cut, we continue to view the market as overly punitive toward Corning shares and see the stock as a buying opportunity for investors. We fully expect the company to recover from its current downcycle. Long term, we believe it is positioned for diversified growth, fueled by its centralized research and development budget that we see giving the firm a cost advantage.

Third-quarter non-GAAP sales declined 6% year over year and 1% sequentially to $3.5 billion. Once again the decline was focused in the optical communications segment, which dropped 30% year over year. Carrier customers in particular, like Verizon and AT&T, are working through existing fiber inventories, which is slowing orders for Corning’s product. We see this current downcycle as exacerbated from heightened orders and buildouts during the pandemic that held many people at home. Other segments fared better, with display glass benefiting from Corning’s higher pricing and cover glass sales benefiting from smartphone launches at Apple and Samsung.

Corning’s non-GAAP gross margin improved 80 basis points sequentially to 37%, despite the decline in sales. Management has actively been working on cost efficiency and adjusting its own utilization to improve profits and cash flow during the optical market downturn, and we expect these efforts to continue bearing fruit.