Gen AI And Optical Advances Will Unlock New Horizons

Key Takeaways

• Expansion through strategic partnerships and product innovation is driving significant revenue growth and improved financial performance.
  
• Focusing on capital allocation and strategic pricing actions enhances profitability and strengthens Corning's market position.
  
• Corning faces execution risks with its strategy on Display and Optical markets, plus potential revenue impacts from currency fluctuations and unmet demand forecasts.

Catalysts

Engages in the optical communications, display technologies, environmental technologies, specialty materials, and life sciences businesses in the United States and internationally.

• Corning's Springboard plan anticipates adding $8 billion in annualized sales run rate by 2028, with $5 billion by 2026, supported by cyclical and secular trends. This strong sales growth is expected to positively impact revenue growth and operating margins.
  
• The company achieved a 46% increase in earnings per share to $0.57 in the fourth quarter of 2024, benefiting from strategic pricing actions and cost efficiencies. Continued focus on pricing and innovation is projected to enhance net margins.
  
• The introduction and strong market adoption of new Gen AI products in the Optical Communications segment have driven significant revenue increases, with expectations that enterprise business will continue to grow at a 25% compound annual growth rate through 2027. This growth is anticipated to significantly contribute to earnings expansion.
  
• Strategic partnerships, such as the agreement with Lumen Technologies, help secure future sales, reserving 10% of Corning's global fiber capacity for 2025 and 2026, which supports consistent revenue growth and potentially higher free cash flow margins due to long-term agreements.
  
• Corning's capital allocation strategy focuses on organic growth investments and share buybacks, which, coupled with increased free cash flow generation (up 42% to $1.25 billion in 2024), is expected to lead to a higher earnings per share trajectory.

Corning Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Corning compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Corning's revenue will grow by 11.1% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 3.9% today to 13.8% in 3 years time.
• The bullish analysts expect earnings to reach $2.5 billion (and earnings per share of $3.0) by about April 2028, up from $506.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 26.5x on those 2028 earnings, down from 70.7x today. This future PE is greater than the current PE for the US Electronic industry at 19.3x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.82%, as per the Simply Wall St company report.

Corning Future Earnings Per Share Growth

Risks

• Corning's reliance on the successful execution of its Springboard plan, including meeting key strategic milestones in markets like Display and Optical, presents execution risks that could affect revenue and operating margins if unmet.
  
• The anticipated demand in Optical Communications is tied to cyclic and secular trends that may not materialize as expected, potentially impacting revenue and net income growth if these factors do not align with forecasts.
  
• Corning's profitability in the Display segment is sensitive to yen currency fluctuations; while they have hedged yen exposure, failure to maintain profitable price increases in a weaker yen environment could affect net margins.
  
• The targeted deployment growth intended by carrier customers may not occur as predicted, influencing Corning's ability to achieve planned revenue expansion within the Optical Communications segment.
  
• Implementation and timing uncertainties pertaining to government programs like BEAD are not expected to impact Corning's financials until 2026, and any delays or adjustments could affect long-term sales forecasts.

Valuation

• The assumed bullish price target for Corning is $61.42, which represents one standard deviation above the consensus price target of $54.3. This valuation is based on what can be assumed as the expectations of Corning's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $68.0, and the most bearish reporting a price target of just $42.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $18.0 billion, earnings will come to $2.5 billion, and it would be trading on a PE ratio of 26.5x, assuming you use a discount rate of 7.8%.
• Given the current share price of $41.78, the bullish analyst price target of $61.42 is 32.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.