Corning Incorporated

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

Corning Incorporated is a materials science company that specializes in advanced optics, specialty materials, and display technologies, serving a range of high-tech and industrial markets.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Corning Incorporated (GLW) operates as a global materials science company, creating transformative technologies that change the way the world uses products for telecommunications, display technologies, specialty materials, and life sciences. Their products are essential to industries like fiber optics, which are the backbone of the internet, high-performance glass for LCD displays, and pharmaceutical vials.

Corning’s business is split into five core segments:

  1. Optical Communications: Includes optical fiber, cable, and related hardware for telecommunications networks. This segment is critical to internet infrastructure, data centers, and 5G networks.
  2. Display Technologies: Manufactures glass substrates for LCD and OLED displays used in TVs, tablets, smartphones, and monitors. Their focus here is on high-performance display glasses, as this segment is a commodity industry.
  3. Specialty Materials: Includes advanced glass and materials for various applications such as semiconductor manufacturing, aerospace, and pharmaceuticals. They have been the leader in this field for many years.
  4. Environmental Technologies: Produces ceramic substrates for gasoline and diesel automotive emission control, a niche market that is heavily regulated.
  5. Life Sciences: Provides laboratory products and solutions for drug discovery, research, and development. These include vials, pipettes, and other scientific research products.

Corning also has a “Hemlock and Emerging Growth Businesses,” division which includes silicon feedstock for the semiconductor industry, new technologies such as advanced optics, and pharmaceutical glass packaging.

Industry Trends & Competitive Landscape

The industries in which Corning operates are characterized by rapid innovation, demanding technological standards, and competition.

  • Optical Communications: The global demand for bandwidth is constantly increasing and requires robust infrastructure investment in fiber optic networks, which favors Corning. Corning competes with other fiber manufacturers, but due to its scale and innovation, it has secured a prominent role in the market.
  • Display Technologies: This is a commoditized industry, with high-volume production and cost competition. Here, Corning must balance cost-competitiveness with high-performance products.
  • Specialty Materials: Corning competes with companies that often have a niche in one area of the many products Corning provides. However, Corning has a long-term and diverse customer base and patents, making them a leader in this segment.
  • Environmental Technologies: This segment is heavily reliant on regulations to enforce emission standards, which creates predictable demand and a degree of barriers to entry.
  • Life Sciences: This sector is characterized by growth in drug development and life science research activities. Corning competes on product performance and ability to create customized solutions for their clients.

Financial Analysis

Here’s a detailed dive into Corning’s financials, focusing on key trends and relevant information:

  • Revenue Distribution: The company’s revenue distribution is diverse across its segments, with Optical Communications and Display Technologies typically contributing the most revenue, and Specialty Materials following close behind.

  • For example, the 2022 annual revenue was $14.8B, with Optical Communication bringing in 3.7B and Display technologies 5.3B.

The diversification does mean more stable income throughout the years.

  • Profitability and Margins:
    • Corning’s operating margins, especially adjusted EBITDA and free cash flow margins vary among segments, with Specialty Materials generally showing the best performance due to pricing power and product differentiation.
  • For example, they targeted an adjusted operating profit of $3.8B for the whole company in 2023.
  • Cash Flow: While capital expenditure is quite high, Corning maintains a stable and growing free cash flow.
  • Debt and Liquidity: The company has a large cash pile which it uses to fund innovation and acquisitions. Their level of debt is reasonable.
  • For example, Corning had $1.7B in cash and investments in September 2022. The debt was $10.8B and they had more than $2B of untapped credit facilities.
  • Return on Invested Capital (ROIC): Overall Corning’s ROIC has been above the weighted average cost of capital(WACC), but certain segments produce substantially higher ROIC numbers than others. The overall rate of ROIC has been about 12-14% for the most of the recent periods.
  • For example, their core segment of Optical Communications ROIC has been around 20% while Display technologies is much lower.
  • Management’s Perspective: In recent earnings calls, management has emphasized the company’s ability to drive long-term sustainable value through innovation, partnerships, and cost management. There’s also been an emphasis on strategic acquisitions to expand into new or adjacent markets.
  • For example, they mentioned increasing capacity for Optical and Material Tech in Q4 2022
  • There is a major emphasis on building brand presence across industries, and the long-term benefits that it will provide.
  • Shareholder Returns: Corning has returned value to shareholders through a mix of dividends and share repurchases.
  • They initiated a share repurchase program of $1.5 billion in December of 2022 and another $3.0 billion in October of 2023.

Moat Assessment: 3 / 5

Corning’s moat is moderate, but certainly not indestructible. They have some advantages that can create lasting and sustainable value, however, the company also operates in segments that require immense innovation to maintain that moat.

  • Intangible Assets (Brand & Patents):
  • Corning has a strong brand name, particularly in display technology and specialty materials. This reputation helps them command premium pricing and maintains customer loyalty.
  • They have a broad array of patents, particularly within their materials science business, that prevents direct copying by competitors.
  • Switching Costs:
    • Many of Corning’s offerings, such as optical fiber and glass, have a high level of integration with the operations of the buyers. Switching to another provider would entail significant costs and risks, making those buyers less likely to switch.
  • Cost Advantages:
    • Corning benefits from economies of scale due to its manufacturing capabilities. However, the products they sell in a few segments are similar to commodity products, and their cost leadership must be maintained in order to create sustainable profit margins.
  • Network Effects: Corning generally does not benefit from network effects. But companies who utilize Corning products to create a product might have high network effects, making the Corning a useful partner.
  • Size/Scale Advantages While being an advantage in a lot of their business, scale is not what creates high profit margins for all business segments. They have massive capital investments, especially in their display technologies and optical communication businesses.

Legitimate Risks to the Moat:

  • Technological Disruption: In technology-intensive industries, particularly the display and telecommunication markets, the biggest risk is that a new technology may replace or disrupt existing technologies, making Corning’s patents or technologies irrelevant.
    • They are trying to offset this through their own R&D, however, the risk is not trivial.
  • Commoditization: Products like glass substrates can turn into commodity-like products, causing lower profits and more competition. There is also competition in their fiber optics and other segments.
  • Economic Cycles: Being a component manufacturer for many different industries, if the economy has a severe slowdown, then Corning’s business would suffer.
  • Acquisition Risk: Acquisitions are often risky, as seen in the company’s history of acquisitions and write-offs. The risk is that these acquisitions do not produce the promised synergies and can be a drag on their profit margins.
  • Dependence on Key Customers: In select businesses, a few large customers make up a large amount of revenue which may leave them vulnerable to a loss of a customer contract.

Business Resilience:

  • Diversification: Corning is well-diversified across different markets, making the business model more resilient to adverse events within a specific segment.
  • Innovation: The company has shown to be a leader in innovation in its specific fields of business, with large research and development budgets and teams.
  • Long Term Contracts: Corning has secured many long-term contracts, particularly with large companies, which provide revenue stability and protection.
  • Operational Efficiency: Management has been effective at improving margins and is very competent in operations and has a strong understanding of their business. They have been taking actions to improve their supply chain and costs, while still maintaining quality.

Understandability: 3 / 5

Corning’s business model has various complexities due to the wide-ranging nature of their products and businesses.

  • Complexity: The business touches on many different technologies and industries, making the business model difficult to understand in depth. However, they can be separated into specific segments that are more understandable than the whole business.
  • Transparency: The information that they provide is relatively easy to understand, however, assessing the quality of future growth within each segment is not trivial.

Balance Sheet Health: 4 / 5

Corning has a strong balance sheet with some potential risks that have been addressed and will continue to be addressed by management.

  • Cash Position: A strong cash position allows flexibility for investment and acquisitions, and will provide a safety net if a crisis occurs.
  • Debt: Corning has a reasonable level of debt which does not cause an immediate threat to the health of the company. But they have high capital requirements in their core business, which could lead to trouble if they have trouble generating free cash flow.
  • Tangible Book Value: Their tangible book value is less than their market value, as they are heavily invested in R&D.

Recent Concerns / Controversies

  • COVID: Corning experienced supply chain issues as a result of lockdowns in China. However, the company has taken significant steps to diversify their supply chain in the future.
  • Inflation: While it has been a headwind, the company has been successfully combating it with price increases.
  • Overvalued Acquisitions The company has had a history of large acquisitions, and had write-offs as some of these acquisitions have underperformed. Management is working to integrate these businesses to realize better profitability.
  • Share Repurchases: While they have been repurchasing shares aggressively, they are still trading at a high valuation multiple, which means that the market may think these shares are still overpriced.

Summary

In summary, Corning is a diversified, complex company operating in some very competitive markets. The company benefits from its expertise in materials science and has a solid competitive position in niche industries. Corning’s management has shown itself to be capable of managing the company and its numerous businesses, and it continues to generate increasing revenues and strong profitability and cash flows. Its main risk is if they fail to maintain innovation at its core, allowing a competitor to steal its edge. Overall, it has a good moat for the average investor, an average understanding, and great balance sheet health.