Gen AI And Lumen Will Advance Optical And Display Solutions

Key Takeaways

• New Gen AI products and a partnership with Lumen Technologies are expected to boost revenue and net margins in Optical Communications.
  
• Price increases in Display Technologies and a yen hedging strategy aim to enhance profitability and stabilize margins.
  
• Currency fluctuations, market downturns, delays in Optical Communications, and unmet milestones in innovations could impact Corning's revenue and earnings growth.

Catalysts

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

• The introduction of new Gen AI products and a partnership with Lumen Technologies is expected to drive significant revenue growth in Corning's Optical Communications segment, enhancing the company's revenue and increasing net margins due to higher demand and volume.
  
• Corning's strategy to implement double-digit price increases in their Display Technologies segment in a weaker yen environment aims to preserve consistent profitability, which is likely to positively impact operating margins and net income.
  
• Corning's Springboard plan to achieve $3 billion in additional annualized sales by the end of 2026 anticipates benefiting from both cyclical and secular trends, suggesting a direct positive impact on revenue and earnings.
  
• Expected increased deployments in the Carrier segment of Optical Communications in 2025, as indicated by customer conversations and market announcements, are likely to boost revenue and potentially improve margins through higher volume leverage.
  
• The company's hedging strategy against yen exposure is touted to maintain stable profitability and mitigate currency risks, stabilizing net margins and supporting consistent EPS growth despite fluctuations in exchange rates.

Corning Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Corning compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Corning's revenue will grow by 9.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 3.9% today to 12.1% in 3 years time.
• The bearish analysts expect earnings to reach $2.1 billion (and earnings per share of $2.5) 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 bearish analyst cohort, the company would need to trade at a PE ratio of 24.4x on those 2028 earnings, down from 72.8x 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 7.8%, as per the Simply Wall St company report.

Corning Future Earnings Per Share Growth

Risks

• Corning's reliance on stable net income in the Display segment amid a weaker yen environment poses a risk as currency fluctuations could affect net margins.
  
• The potential for market downturns in certain segments, like Environmental Technologies where sales were down due to weaker markets in Europe, could impact overall revenue and net income growth.
  
• The anticipated increase in carrier deployments in Optical Communications might face delays or disappointments, impacting the projected revenue growth targets.
  
• While Corning has introduced solar and automotive innovations, the achievement of milestones necessary for scaling could fall short, affecting the projected add-on to revenue and overall earnings.
  
• The company has yet to see significant financial benefits from the BEAD program, which may delay expectations for its contribution to future revenue growth.

Valuation

• The assumed bearish price target for Corning is $46.77, which represents one standard deviation below the consensus price target of $51.99. 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 more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $60.0, and the most bearish reporting a price target of just $42.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $17.0 billion, earnings will come to $2.1 billion, and it would be trading on a PE ratio of 24.4x, assuming you use a discount rate of 7.8%.
• Given the current share price of $42.97, the bearish analyst price target of $46.77 is 8.1% higher. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
• 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.