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It has been about a month since the last earnings report for Corning (GLW). Shares have added about 10.3% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Corning due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Corning Q3 Earnings Lag Estimates on Global Disruptions
Corning reported unimpressive third-quarter 2021 results, wherein both the bottom and the top lines missed the Zacks Consensus Estimate. It should be noted that lower production levels in the automotive industry due to the semiconductor chip shortage affected sales by almost $40 million and earnings per share (EPS) by 2 cents.
On a GAAP basis, net income in the September quarter was $371 million or 43 cents per share compared with $427 million or 48 cents per share in the prior-year quarter. Despite an increase in operating income, net income declined mainly due to zero transaction-related gain, which was $498 million in third-quarter 2020, and higher provision for income tax. Core net income increased to $485 million or 56 cents per share from $380 million or 43 cents per share in the year-ago quarter. The bottom line, however, missed the Zacks Consensus Estimate by 2 cents.
Quarterly GAAP net sales increased 20.5% year over year to reach an all-time high of $3,615 million, driven by strong growth in the Optical Communications business. Core sales grew to $3,639 million from $3,007 million. The top line, however, missed the consensus estimate of $3,665 million.
Net sales in Optical Communications increased 24.4% year over year to $1,131 million. 5G, broadband, and cloud computing continue to drive strong growth across this segment. The segment’s net income was $139 million compared with $115 million in the prior-year quarter. Higher raw material and shipping costs significantly hurt profitability.
Net sales in Display Technologies were $956 million compared with $827 million in the prior-year quarter, thanks to an increase in glass prices. The segment’s net income was $247 million compared with $196 million in the year-ago quarter.
Specialty Materials’ net sales were down 2.5% year over year to $556 million. That said, the company is witnessing significant demand for its premium cover materials and advanced optics products, driven by strength in the IT, mobile device, and semiconductor markets. The segment’s net income was $107 million compared with $146 million a year ago. In the fourth quarter, Corning expects volume declines in Gorilla Glass following builds supporting flagship product launches by customers.
Environmental Technologies’ net sales inched up 1.6% year over year to $385 million, driven by diesel product sales. The automotive industry was significantly affected by the semiconductor chip shortage as OEMs extended shutdowns due to production constraints, and Corning’s automotive sales and profitability were down as a result. The company expects sales and profit to be further adversely impacted in the fourth quarter. The segment’s net income was $60 million compared with $69 million in the year-ago quarter.
Net sales in Life Sciences were up 36.8% year over year to $305 million. The rise was driven by ongoing demand to support the pandemic response, recovery in academic and pharmaceutical research labs, and strong demand for bioproduction vessels and diagnostic-related consumables. The segment’s net income improved to $45 million from $28 million a year ago.
Cost of sales increased 14.7% year over year to $2,294 million. Gross profit improved to $1,321 million from $1,001 million. Core gross profit was $1,394 million compared with $1,130 million in the prior-year quarter, with respective margins of 38.3% and 37.6%. Operating income was $552 million compared with $257 million a year ago.
Cash Flow & Liquidity
During the first nine months of 2021, Corning generated $2,389 million of cash from operating activities compared with $1,406 million in the prior-year period. Free cash flow increased to $1,340 million from $484 million. As of Sep 30, 2021, the company had $2,212 million in cash and cash equivalents with $7,019 million of long-term debt.
Despite supply chain challenges and inflationary headwinds, Corning remains focused on driving top-line growth and expanding its margins. The company is well-positioned to address the growing customer demand, broaden its portfolio, and enhance shareholders’ value. For the fourth quarter, it expects core sales in the range of $3.5 billion to $3.7 billion. Core EPS is estimated between 50 cents and 55 cents. Profitability is anticipated to decline slightly on a sequential basis due to further reductions in automotive industry-related sales and lower Gorilla Glass sales following large product launches by customers. For the full year, Corning is on track to reach $14 billion in sales and more than $2 in EPS.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -9.82% due to these changes.
Currently, Corning has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Corning has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.
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