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Will AI Help Corning (GLW) Could Break Out From Its Value Trap?
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Financial professors would use Corning (GLW) as a cautionary tale, an outstanding value stock that went nowhere. Yet, the makers of the Gorilla Glass that is found on televisions and mobile phones had a trick up their sleeve—optical fiber. Corning’s optical fiber and connectivity solutions are essential components in the infrastructure required to support AI and machine learning applications. As companies invest heavily in AI capabilities, they require robust, high-speed networks to handle the massive data transfers involved in AI processing. The company recently made headlines when it lifted its Q2 sales outlook due to generative AI demand, catching the attention of financial pros and retail investors alike, according to our TrackStar data. For a company that’s been plagued by stagnant sales, this could be a game-changer. But let’s be objective about this and look at the facts. Corning’s Business Known for its expertise in glass science, ceramic science, and optical physics, Corning produces a diverse range of high-tech components for consumer electronics, mobile devices, optical communications, automotive applications, and life sciences. The company serves a wide array of industries, including telecommunications, consumer electronics, automotive, and healthcare. With manufacturing facilities and sales offices in more than 30 countries, Corning’s reach extends across North America, Europe, and Asia. Corning segments its business into the following areas:
In a recent update, Corning announced expectations to exceed its second-quarter 2024 guidance, projecting core sales of approximately $3.6 billion compared to the previously guided $3.4 billion which it attributed to the strong adoption of new optical connectivity products for Generative AI. Additionally, the company anticipates a return to year-over-year growth in both core sales and core earnings per share, marking a significant turnaround from recent quarters. Corning’s management has introduced the “Springboard” framework, aiming to add more than $3 billion in annualized sales over the next three years. This ambitious plan capitalizes on both cyclical factors and secular trends across Corning’s diverse market segments. With existing production capacity and technical capabilities already in place, the company expects to deliver strong incremental profit and cash flow as it captures this growth opportunity. Financials
Source: Stock Analysis Although Corning’s sales rose slightly over the past decade, gross and profit margins have compressed. Total cash from operations stalled at around $2 billion for the past decade. The company carries $8.2 billion in debt with $1.4 billion in cash on hand, giving it ample liquidity for operations and to pay its 2.5% and modest share buyback. Valuation
Source: Seeking Alpha At its current price, Corning trades at a 20% premium to its 5-year average P/E multiple. Even its forward multiple is higher than its peers. Only when we look at price to cash flow do we companies like Fabrinet (FN) and Nvent Electric Plc (NVT) coming in with higher ratios. Growth
Source: Seeking Alpha Growth is an issue across the industry. Some like Celestica (CLS), put up solid YoY numbers and expect to increase sales by double digits in 2024. Yet, for Corning, who trades at high P/E and price-to-cash ratios, the revenue growth is abysmal, with an outlook that isn’t convincing. Profitability
Source: Seeking Alpha Corning may not have growth, but it is very profitable (hence why it’s been a value trap). It delivers the highest gross margin, though its net income and free cash flow margin fall short of peers like Fabrinet. Unsurprisingly, its returns on equity, assets, and total capital land in the low single digits.
Our Opinion 3/10 Corning would need substantial growth to justify its current stretched multiples. Generative AI may help that, but it wouldn’t leave room for upside from here. While it runs a sound overall business, the ‘value trap’ name still applies. We simply don’t see enough possible growth to make this a worthwhile investment. |
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