What’s Next For Corning Stock After Downbeat Q3 Guidance?

Corning (NYSE: GLW) recently reported its Q2 results, with revenues and earnings aligning with the street estimates. The company reported core revenue of 3.6 billion and adjusted earnings of $0.47 per share, driven by strong demand for its optical connectivity products for generative AI. Although the company posted an in-line quarter, we think its stock has some room for growth from levels of around $40. In this note, we discuss Corning’s stock performance, key takeaways from its recent results, and valuation.

Firstly, let us look at Corning’s stock performance in recent years. GLW stock has seen little change, moving slightly from levels of $35 in early January 2021 to around $40 now, vs. an increase of about 50% for the S&P 500 over this period. Overall, the performance of GLW stock with respect to the index has been lackluster. Returns for the stock were 3% in 2021, -14% in 2022, and -5% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that GLW underperformed the S&P in 2021 and 2023.

In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Information Technology sector including MSFT, AAPL, and NVDA, and even for the megacap stars GOOG, TSLA, and AMZN. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could GLW face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months — or will it see a strong jump? From a valuation perspective, GLW stock looks like it has little room for growth. We estimate Corning’s Valuation to be $44 per share, reflecting a 10% upside from its current market price. Our forecast is based on a 23x P/E multiple for GLW and expected earnings of $1.91 on a per-share and adjusted basis for the full year 2024. We have assigned a higher valuation multiple compared to the stock’s historical average of around 18x, given a rebound in demand for its optical communication business and the potential for strong growth amid the AI boom.

Corning’s revenue of $3.25 billion on a GAAP basis was up 0.2% y-o-y, while core sales of $3.6 billion were up 4%. The sales growth was driven by display technologies, up 9%, and optical communications, up 4%. Looking at other segments, specialty materials sales were up 18% and life sciences up 8%. The growth from these segments was partly offset by a 21% decline in Hemlock and emerging business sales and a 6% fall in environmental technologies’ revenue.

AI-related connectivity solutions drove the optical communication sales, while display business continued to benefit from higher pricing. The company saw its adjusted operating margin contract by 10 bps y-o-y to 17.4% in Q2. The company’s adjusted EPS stood at $0.47, compared to $0.45 in the prior-year quarter.

Corning expects its Q3 core sales to be around $3.7 billion and adjusted earnings per share in the range of $0.50 and $0.54. However, the guidance fell short of the $0.55 earnings per share street expectations. Overall, Corning posted an in-line Q2, while the Q3 outlook was a slight let down. The demand for fiber optics is on the rise as data processing for AI systems increases, and this should bode well for Corning.

[1] Returns as of 7/31/2024
[2] Cumulative total returns since the end of 2016