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Corning Warns of Glass Price Declines, No Change to Fair Value Estimate

Post Time:Nov 30,2011Classify:Company NewsView:448

This morning, Corning

Corning's LCD display glass business is facing three main challenges. First, end-market television demand appears to be slowing, with annual U.S. LCD television unit growth slowing from 13% in September to 4% in October. Second, panel makers are maintaining inventory levels at historically low levels. Finally, Samsung Corning Precision (SCP), which sells LCD display glass to Korean panel makers, appears unable to regain lost market share despite recent price concessions.

We are not overly concerned about the first two issues. Although we don't anticipate inventory levels or volume growth to return to peak levels, we do think inventories have little room to fall further. Additionally, we believe that ongoing television penetration in emerging markets and a continued push toward larger television screen sizes will drive upper-single-digit glass volume growth over the next few years.

The share losses, however, warrant concern. Management had noted in its third-quarter earnings call that it expected SCP's glass volume to increase 20% in the fourth quarter, as the firm planned to lower pricing in the fourth quarter in order to regain lost share in the Korean market. Today, Corning's management acknowledged that these price concessions have not facilitated share gains and that SCP's glass volume will increase only 5% to 10% sequentially. Since we view manufacturing scale as a key source of the firm's competitive advantage in glass, we believe that Corning will likely need to lower prices even further in 2012 in order to reclaim lost share. At this point, we are maintaining our long-run revenue and gross margin forecasts, but if Corning experiences an extended period of accelerated price declines, we would most likely be forced to revisit both assumptions.

Additionally, Corning announced that revenue from Gorilla Glass will fall 25% sequentially, versus its previous estimate of a 15% drop, due to weaker-than-expected demand for tablet cover glass. We would caution investors not to extrapolate this data point as an indication of weakening tablet demand. Any number of factors, including Gorilla Glass inventory corrections, improving manufacturing yields, and unexpected price declines, could be contributing to Corning's downward fourth-quarter revision.

Corning's stock is now trading significantly below our $19 fair value estimate and is approaching 5-star territory. Although we expect the next few quarters will be challenging, the current market valuation provides a significant margin of safety for longer-term investors.

Source: www.morningstar.comAuthor: shangyi

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