corning, inc. glw fin

Important disclosures appear on the last page of this report.

The Henry Fund

Henry B. Tippie School of Management

Ashutosh Kumar Jha [[email protected]]

Corning Incorporated (GLW) March 11, 2015

Information Technology – Electronics Components Stock Rating Hold

Investment Thesis Target Price $24.00-$26.00 Corning, Inc. is well positioned to remain a market leader, however its success is largely dependent on profits from its Display Technologies segment. The growth in volume in the display segment is largely offset by decline in average selling prices. We recommend HOLD rating for Corning Inc. (GLW) with a mean target price of $25, which provides 8.23% upside from its current market price of $23.10. Drivers of Thesis

Demand for larger screen sizes. Increase in TV sizes drove sales in glass market in 2014, with screen sizes of 50-inch and more growing as much as 50%. We expect the trend to continue. We expect the decline in average selling prices of devices to remain moderate (2%) in 2015.

Demand for Corning’s fiber optic solutions. Wireless Distributed Antenna Systems and data centers are expected to grow at 14% and 10% CAGR respectively, from 2014 to 2018. Fiber–to–the-home (FTTH) network is growing at 9% per year. We expect these factors to generate steady demand for fiber optic solutions which will drive Corning’s growth in Optical Communications segment.

Growth possibilities in automotive market. There has been increasing trend of use of Gorilla Glass in automobile industry, which is believed to be a $7 billion market (5.5 billion square feet). Considering total Gorilla Glass market currently is just around 1 billion square feet, this will serve as a long-term driver for the Specialty Material segment.

Risks to Thesis

Continued pricing pressure in LCD industry. The decline in average selling prices offsets the growth in volume shipments and restricts the revenue upside for Display Technologies segment.

Threat of breakthrough innovations. Although Gorilla Glass is currently market’s preferred choice, any breakthrough innovations such as sapphire can compromise its competitive advantage and result in loss of contracts and market share for Display and Specialty Materials segments.

Weaker demand for ultra high-definition television than expectation.

Henry Fund DCF $24.36 Henry Fund DDM $20.97 Relative Multiple $32.00 Price Data Current Price $23.10 52wk Range $17.03 – 25.16 Consensus 1yr Target $24.13 Key Statistics Market Cap (B) $31.28 Shares Outstanding (M) 1271.00 Institutional Ownership 78.7% Five Year Beta 1.29 Dividend Yield 2.0% Est. 5yr Growth 4.7% Price/Earnings (TTM) 1..53 Price/Earnings (FY1) 1.55 Price/Sales (TTM) 3.20 Price/Book (mrq) 1.60 Profitability Operating Margin 18.8% Profit Margin 25.5% Return on Assets (TTM) 8.4% Return on Equity (TTM) 11.6%

Earnings Estimates Year 2012 2013 2014 2015E 2016E 2017E

EPS $1.10 $1.35 $1.82 $2.06 $2.09 $2.37

growth -39.02% 23.33% 34.78% 12.94% 1.43% 13.68%

12 Month Performance (Source: Factset) Company Description

Corning Incorporated is a world leader in the manufacture of specialty glass and ceramics. Corning creates and makes components that enable high-technology systems for consumer electronics, mobile emissions control, optical communications and life sciences. Corning operates in five reportable segments: Display Technologies, Optical Communications, Environmental Technologies, Specialty Materials and Life Sciences. Corning manufactures and processes products at approximately 90 plants in 17 countries.

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EXECUTIVE SUMMARY

Demand for bigger screens and 100% consolidation of subsidiary Corning Precision Materials were primary driver of Corning’s strong 2014 results. However, in 2015, the segment will have to deal with tough year-on-year comparisons. Consumers are trading up to larger screen sizes due to their declining prices and greater viewing pleasure. LCD glass demand will likely remain low sequentially in the first quarter due to weak retail demand in the second quarter and fewer shipping days in February but volumes should be higher year-on-year, reflecting the growth in demand for larger screen LCD televisions. We expect price declines to remain moderate going forward. In future ultra high-definition televisions, which have higher average screen size, higher resolution and more pixels is expected to become a major growth driver of the glass market. This will improve Corning’s dollar content from Display Technologies segment.

Increasing use of connected devices, emergence of cloud environment and change in pattern of data consumption (around 50% data used for video content) will promote demand for efficient network. Global data is estimated at 4.4 trillion Gigabytes and is expected to double every year. Number of connected devices is expected to reach 19 billion mark by 2018. Wireless Distributed Antenna Systems are expected to grow at 14% CAGR from 2014 to 2018. Data centers are expected to grow at 10% CAGR from 2014 to 2018. Fiber–to–the-home (FTTH) network is growing at 9%. We expect these factors to drive Corning’s Optical Communication segment in next few years.

There has been increasing trend of use of Gorilla Glass in automobile industry, which is believed to be $7 billion market. Corning Gorilla Glass for automotive can be used in all openings of a vehicle, including windshields, sidelights, sunroofs, and backlights. It can also be used in automotive interior touch panels. If Corning can secure a contract from certain car manufacturer for Gorilla Glass, that will serve as a long-term driver for the Specialty Material segment. Increase in number of heavy duty and light duty vehicles and restriction on emissions will create increased demand for Corning’s Environmental Technologies segment products.

As most of Corning’s profitability and cash flow is dependent of Display Technologies segment, the decline in LCD prices is a major concern. Due to consumers’ trend of shifting to lower end devices in emerging markets, there

is constant pricing pressure on devices manufactures, who then transfer this pressure on panel makers and glass manufacturers in order to save margins. This decline in average selling prices offsets the growth in volume shipments and restricts the revenue upside for Display Technologies segment. Also GLW is trading at price near 52 week high, providing 6% upside to target price. For these reasons we recommend a HOLD rating for Corning, Incorporated.

COMPANY DESCRIPTION

Corning Incorporated is a world leader in the manufacture of specialty glass and ceramics. Corning creates and makes components that enable high-technology systems for consumer electronics, mobile emissions control, optical communications and life sciences.

Source: Corning Inc. 10k, 2014

Corning operates in five reportable segments: Display Technologies, Optical Communications, Environmental Technologies, Specialty Materials and Life Sciences. Corning manufactures and processes products at approximately 90 plants in 17 countries.

Display Technologies

Corning’s Display Technologies represented 39.64%, 32% and 36.34% of the total revenue in 2014, 2013 and 2012 respectively. Despite the fact that this segment represents less than 50% of revenue, this segment is clearly the primary driver for profitability and cash flow for the company, considering that it represented 77.13% of total

39.64%

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2014 Revenue- Segment Distribution

Display Technologies

OpticalCommunications

EnvironmentalTechnologies

Specialty Materials

Life Sciences

All Other

net income for 2014. This number for 2013 was 74.85%. This segment manufactures glass substrates for active matrix liquid crystal display (LCDs) that are used primarily in LCD televisions, notebook computers and flat panel desktop monitors.

Source: Corning Inc. 10K, 2014

Through the end of 2013, the Display Technologies segment also included the equity affiliate Samsung Corning Precision Materials Co., Ltd, of which Corning owned 57.5% and Samsung Display Co., Ltd. owned 42.5%. In January 15, 2014 Corning obtained full ownership of Samsung Corning Precision Materials. This organization, named Corning Precision Materials, was integrated in Corning’s Display Technologies. Also, Corning and Samsung Display extended their long-term LCD display glass supply agreement through 2023. LCD glass manufacturing is a capital intensive business. Important attributes for success include efficient manufacturing, access to capital, technology know-how, and patents. As a result of the transactions with Samsung Display, Corning expects to realize increased flexibility in glass-melting capabilities, which will allow the company to re-evaluate the need for major capital expenditures for additional fusion glass manufacturing assets.

Corning’s Display Technologies segment is at the top of the supply chain. LCD panel makers are the primary customers for this segment, who use the LCD substrates to create LCD panels. These panels are then supplied to consumer electronics manufacturers who use it in their products.

As LCD glass generates significant amount of the company’s profits and cash flow, any events that adversely affect the market for LCD glass substrate could have a big impact on the company’s performance. These events could include loss of patent protection, increased costs associated with manufacturing, decline in prices of LCD glass substrates, decline in average prices of LCD panels or electronics appliances using LCD glass, decrease in demand of consumer electronics leading to overcapacity of LCD, and increased competition from the introduction of new, and more desirable products. Additionally, emerging technologies could replace or reduce the amount of use of glass substrates for certain applications, including display glass, cover glass and others, resulting in a decline in demand for the products.

Source: DisplaySearch

Primary drivers of revenue for this segment are Corning’s market share in terms of % of total revenue of the LCD industry, total number of LCD shipments and Average LCD price per shipment. Thus, this segment is heavily dependent on end products (consumer electronics) supply and demand. The segment is also positively impacted by increase in amount of glass substrates used in those end products. The growth of screen sizes of television was the main driver for profitability during 2014. As the demand for larger screen size goes up, on one hand company benefits from extra volume sales and on the other hand it is able to reduce cost due to economies of scale.

Steady decline in average selling prices (ASPs) of its end products such as televisions, tablets, notebooks etc. is

77.13%11.55%

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2014 Net Income (Loss)-Segment Distribution

DisplayTechnologies

OpticalCommunications

EnvironmentalTechnologies

Specialty Materials

Life Sciences

All Other

$31.50

$32.00

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2015 2016 2017 2018 2019 2020

Display Technologies Drivers

Total number of LCD shipments (Millions)

Average LCD price per shipment

another factor which impacts the revenue for this segment.


There are two primary reasons for this decline. First, this segment operates in emerging markets primarily in Asian countries such as China, Taiwan, Japan and Korea. Local companies in these regions are emerging to provide strong competition to global brands. Consumers are showing trend towards shifting to lower end devices. This puts lot of pressure on global manufacturers to reduce prices. When they eventually reduce prices their margins become narrow and then they put pressure on panel makers to reduce prices. This chain continues till it reaches the glass substrates manufacturers. Second, this industry is cyclic in nature. The demand is not consistent and as a result the supply chain often faces problems such as over capacity and scarcity. While both can lead to price volatility, overcapacity has a negative impact on revenues as the ASPs tend to go down.


Moving forward in 2015 this segment will benefit from increasing synergies from the consolidation of Corning Precision Materials. The Segment should also benefit from increase on the number of TV shipments and the increase in average screen sizes. According to management, the

demand in 2015 is expected to remain from steady to decreasing slightly. But according to DisplaySearch PriceWise published in February 2015, the demand currently in the market is week and the inventories are piling up in the supply change which can potently lead to reduced average selling prices. Panel makers (customers of Corning) sell their panels in US dollars and are benefitting from recent weakening of Japanese Yen and operating margins of Corning’s competitors are such that they cannot afford to lower prices any more if they intend to remain profitable. These are the reasons for us to believe that price decline will only be moderate. We expect that the decline in the average selling prices would be moderate in 2015 and the revenue from this segment in 2015 will decrease by 2% as compared to 2014.

We expect Corning’s LCD market share in terms of % of revenue to remain steady and increase gradually from 4.65% in 2015 to 4.71% in 2020. We expect the total number of LCD shipments to increase at 1.61% CAGR from 2015 to 2020 and average LCD price per shipment to increase at 1.11% CAGR from 2015 to 2020. We expect revenue for this segment to increase at 3% CAGR from 2015 to 2020.

Optical Communications

Corning’s Optical Communications represented 27.30%, 30% and 26.61% of the total revenue in 2014, 2013 and 2012 respectively. But this segment represented only 11.55% of the total net income in 2014. Optical Communications segment has evolved from being a manufacturer of optical fiber and cable, hardware and equipment to being a comprehensive provider of industry-leading optical solutions across the broader communications industry. This segment, previously known as Telecommunications, is divided into two segments: 1) Carrier network and 2) Enterprise network.

The carrier network product group consists primarily of products and solutions for optical-based communications infrastructure for services such as video, data and voice communications. The enterprise network product group consists primarily of optical-based communication networks sold to businesses, governments and individuals for their own use. Carrier network product portfolio consists of optical fiber products which are used in submarine networks, long-haul, regional and metropolitan networks, and fiber-to-the-home (FTTH) network applications.

Corning has a full complement of operator-grade distributed antenna systems (DAS), including the recently developed Optical Network Evolution (ONE) wireless platform. The ONE provides virtually unlimited bandwidth, and meets all the wireless service needs of large-scale enterprises at a lower cost than the typical DAS solution.

Optical Communications segment customers’ purchases of products are affected by their capital expansion plans, general market and economic uncertainty and regulatory changes, including broadband policy. Sales in the Optical Communications segment are expected to be impacted by the pace of fiber-to-the-premises deployments. This segment sales will be dependent on planned targets for homes passed and connected. Changes in its customers’ deployment plans could adversely affect future sales.

Bandwidth demand continues to driver this segment. The profit growth is driven by innovation, operations scale and complementary acquisitions. Data Creation/Consumption, Data Processing and Data Traffic are primary drivers moving forward. Global data is estimated at 4.4 trillion Gigabytes and is expected to double every year. This rise in data not only drives the sales of various devices, such as mobile phones which are growing in number and are expected to reach 10 billion mark by 2018, but also call for increase in number and coverage of wireless networks. Wireless DAS are expected to grow at 14% CAGR from 2014 to 2018.

Another primary driver for this segment will be Data processing which requires increased number of data centers. Expectation is that by 2018, 40% of data will move in to the cloud and as data centers are vital for this technology, numbers of data centers will grow increasing the demand for products of Corning’s Optical Communications segment. Data centers are expected to grow at 10% CAGR from 2014 to 2018. Corning’s completed the acquisition of TR manufacturing in January 2015. This provides them access to Hyperscale segment. Hyperscale is also expected to grow at 15% CAGR from 2014 to 2018.

Also, the global IP traffic is expected to increase by 50% by 2018. The number of connected devices in 2018 is expected to be around 19 billion. It is estimated that there would be 240 million homes connected by fiber-to-the-home (FTTH) network. FTTH is growing at 9%. This heavy data traffic will provide growth for Optical Communications segment. This growth in FTTH is driven by

heavy North America deployments. We expect the revenue from Optical Communication segment to increase by 10% in 2015. We expect this segment to grow at 4% CAGR from 2015-2020.

Recently, the net neutrality bill was passed, which meant internet service providers (ISPs) will not be able to use variable pricing models. We expect this will affect the motivation level of ISPs to provide high speed networks as they will not be able to retain the same margins they used to have when they could charge customers according to their usage of data. This margin cut could potentially impact the optical fiber suppliers such as Corning’s Optical Communications segment.

Environmental Technologies

This segment represented 11.24% of total revenue and 10.25% total net income in 2014. Corning’s Environmental Technologies segment manufactures ceramic substrates and filter products for emissions control in mobile and stationary applications around the world. As global emissions control regulations tighten, Corning has continued to develop more effective and durable ceramic substrate and filter products for gasoline and diesel applications.

Corning manufactures substrate and filter products in New York, Virginia, China, Germany and South Africa. Corning sells its ceramic substrate and filter products worldwide to catalyzers and manufacturers of emission control systems who then sell to automotive and diesel vehicle or engine manufacturers. Although most sales are made to the emission control systems manufacturers, the use of Corning substrates and filters is generally required by the specifications of the automotive and diesel vehicle or engine manufacturers.

Moving forward the primary drivers for this segment are going to be Vehicle production, Advancing Regulations and innovations. According to IHS Automotive Jan.2015, growth in global regulated vehicles in heavy duty and light duty segments is expected to be 13% CAGR and 4% CAGR from 2014 to 2018 respectively. To ensure compliance with emission standards, automobile manufacturers resort to the use of emission control systems.

As these standards get even stricter, automobile manufacturers have to upgrade to newer and effective emission control systems in order to remain compliant.

This has a positive impact on the automotive exhaust systems market, which includes manufacturers of automotive substrates and filters. In September 2014, the European Union implemented Euro 6 emission standards for both gasoline and diesel engine vehicles. Though is not much change for gasoline vehicle emission norms from the Euro 5, the Euro 6 standards for diesel engines have become very stringent. This is one of the primary reasons why Corning is scaling up the production of its diesel engine emission filter, Corning Dura Trap AT HP.

The U.S. will be implementing its Tier 3 emission standards for light-weight vehicles starting 2017, which requires a 75% reduction in emissions. For heavy-duty vehicles such as trucks and buses, it presently follows the 2007 Heavy Duty Highway Rule. Also for light-duty vehicles, China implemented its China IV emission standards in July 2013 and is working towards implementing China 5 standards nationwide by January 2018. For heavy-duty vehicles, China is currently following the China IV emission standards and plans to roll out the China 5 standards soon. These regulations presents a global growth opportunity for Corning’s Environmental Technologies, which primarily generates its revenues from automotive and diesel filters. At present, Corning occupies close to 3% of the automotive exhaust systems market.

Innovations and process improvements have helped this segment to grow and cut costs. Increased process rate, yield, material and labor utilization have helped this segment to double output on existing heavy-duty assets from 2010 to 2014. Corning FLORATM substrates was selected by Honda Motor Company for model year 2016 platform. The segment will look to partner with leading OEMs in 2015 and management believes that there would be more platform wins in 2015.

In 2015, we expect the revenue from this segment to grow by 1%. This is mainly because the growth from increased volume sale will be offset by weaker Euro and new plant depreciation. Without foreign currency effects the growth would have been 6%. We expect this segment to grow at 3% CAGR from 2015-2020.

Specialty Materials

Corning’s Specialty Materials represented 12.40% and 8.11% of the total revenue and total net income in 2014 respectively. The Specialty Materials segment manufactures products that provide more than 150

material formulations for glass, glass ceramics and fluoride crystals to meet demand for unique customer needs. Consequently, this segment operates in a wide variety of commercial and industrial markets that include display optics and components, semiconductor optics components, aerospace and defense, astronomy, ophthalmic products, telecommunications components and cover glass that is optimized for portable display devices.

Corning’s cover glass, known as Corning Gorilla Glass, is a thin sheet glass designed specifically to function as a cover glass for display devices such as tablets, notebook PCs and mobile phones. Elegant and lightweight, Corning Gorilla Glass is durable enough to resist many real-world events that commonly cause glass failure, enabling exciting new applications in technology and design. In the fourth quarter of 2014, Corning announced its latest breakthrough innovation in consumer electronics material design, Corning Gorilla Glass 4, which delivers the highest damage resistance performance versus all alternative compositions, and has the capability to significantly improve device drop performance. Corning Gorilla Glass is manufactured in Kentucky, South Korea, Japan and Taiwan.

In 2014, Specialty Materials segment improved revenues by $35 million, driven by an increase in sales of advanced optics products. Corning Gorilla Glass sales remained consistent with the prior year, with volume increases offset by an unfavorable shift in product mix and price declines. There are several drivers for this segment. Touch devices are one of the major driver.

Number of Touch Devices (Billions)

Source: International Data Corporation (IDC)

The growth in volume unit shipment of devices such as smartphones, tablets etc. will see increased demand for Corning’s Gorilla Glass. Another driver for this segment would the increase in smartphone average screen size. According to IHS, the average screen size of smartphones is expected to increase from 5.5 inches in 2014 to 6.5 inches in 2018.

Smartphone Average Screen Size (Inch)

Source: DisplaySearch, IHS

The cover glass market was expected to grow at 13% CAGR from 2013 to 2016 according to Corning Analysis. Also, Corning has gained additional share in cover glass market, mainly because of emergence of touch enabled Notebook market. These all factors will lead to more demand for Corning’s Gorilla Glass in coming days. Corning should also benefit from its extensive marketing efforts in Chinese market to improve brand awareness.

Cover Glass Market Shipment (Million ft2)

Source: Corning Inc., Analysis

Specialty Material segment is also dependent on demand from emerging Asian markets specially China. Due to emergence of local brand in those regions, consumers are shifting to low end devices, which is putting pressure on global brands to reduce prices. When the device manufacturers cut prices, their margin reduce and they then try to negotiate with specialty material manufacturers. This leads to decline in average selling prices of materials, which limits the revenue growth for company such as Corning. But as Corning introduced Gorilla Glass 4 in fourth quarter of 2014, we expect that the prices would not decline much in 2015, as historically it has been observed that initially new technologies have been able to sustain high prices before eventually the price declines over time.

Due to the superior performance of Gorilla Glass 4, Corning will have the pricing power. Corning has also made some progress on increasing its share in smartphones market in China and at the same time has maintained its own share against aluminosilicate glass competitors on devices. We expect the revenue from this segment to grow by 10% in 2015. Over the period of 2015-2020, we expect this segment to grow at 4.5% CAGR.

Life Sciences

Corning’s Life Sciences segment represented 8.87% and 4% of the total revenue and total net income in 2014 respectively. Life Sciences laboratory products include general labware and equipment, as well as specialty surfaces, media and reagents that are used for cell culture research, bioprocessing, genomics, drug discovery, microbiology and chemistry. Corning sells life science products under these primary brands: Corning, Falcon, PYREX, Axygen, and Gosselin. The products are marketed worldwide, primarily through distributors to pharmaceutical and biotechnology companies, academic institutions, hospitals, government entities, and other research facilities. Corning manufactures these products in the United States in Maine, New York, New Jersey, California, Utah, Virginia, Massachusetts and North Carolina, and outside of the U.S. in Mexico, France, Poland, and China.

Research is primary driver of this segment. In developed markets, research is growing at 2%, slowed by flat government funding. In emerging markets, research is growing at 8%, mainly driven my China. This segment also will be affected by weaker Euro. We expect this segment

revenue to grow by 2% in 2015. Also, we expect this segment to grow at 1.7% CAGR from 2015-2020.

Other Corporate Investments

Corning has a 50% equity interest along with The Dow Chemical Company in Dow Corning Corporation, a company that manufactures silicones products globally. Corning’s net income includes equity earnings from affiliated companies. For the year ended December 31, 2014, Corning recognized $266 million of equity earnings, of which approximately 95% came from Dow Corning. Dow corning is also the majority owner of Hemlock Semiconductor Group, which produces high purity polycrystalline silicon for the semiconductor and solar energy industries. Corning also has a 50% equity interest along with PPG Industries in Pittsburg Corning Corporation (PCC), a company that manufactures glass products for architectural and industrial uses and a 50% investment in Pittsburgh Corning Europe N.V. (PCE), which is a Belgian Company that manufactures glass products for industrial uses primarily in Europe.

Polysilicone demand is growing as solar customers are expected to buy Polysilicone to fulfill their annual contract commitments. But some of the growth will be offset by increasing raw material prices. Silicone business sales is expected to remain consistent but lower tax rate and lower operating expense should increase profitability. We expect 10% growth year over year in revenues from Dow Corning.

RECENT DEVELOPMENTS

GTAT files for Bankruptcy

One of Corning’s major customers, Apple Inc., was considering replacing Corning’s Gorilla Glass with Sapphire in its most popular product iPhone. Apple loaned $439 million to a company known as GT Advanced Technologies Inc. last year, to bankroll sapphire production. Unable to meet its supply agreements, GTAT filed for bankruptcy in October 2014. Initially sapphire crystal were in headlines as its backers claimed it was more scratch resistant and less breakable than Gorilla Glass. Corning responded that sapphire is also much more expensive to manufacture and that it is less transparent and heavier than Gorilla Glass. Which product is more likely to scratch or break in real world is still a matter of dispute, but Gorilla Glass dominance is global smartphone market is set to continue.

4Q14 & FY14 Earnings and 2015 Guidance

For 4Q14, Corning posted ‘core’ revenue of $2.60 billion, which was up 32% year-over-year on a core basis and GAAP revenue of $2.40 billion was up 23%. Core EPS of $0.45 per diluted share for 4Q14 increased 56% year-over-year. The Wall Street consensus had modeled revenue of $2.49 billion and core EPS of $0.38 per diluted share for 4Q14.

‘Core’ gross margin narrowed sequentially to 44.7% in 4Q14 for 45.4% in 3Q14, while rising from 40.0% in 4Q13. Core pretax margin expanded to 29.3% in 4Q14 from 25.7% in 4Q13. Margin comparisons are potentially distorted by the consolidation of SCP into wholly owned operations.

On a GAAP basis, Corning reported earnings of $0.70 per diluted share in 4Q14, compared to $0.70 per diluted share in 3Q14; a year earlier, GAAP earnings were $0.30 per diluted share. Non-GAAP earnings on a core basis were $0.45 per diluted share in 4Q14, compared to $0.40 per diluted share in 3Q14 and $0.29 in 4Q13.

For all of 2014, Corning’s Core revenue of $10.22 declined increased 26% for $7.95 billion in 2012. Non-GAAP core earnings totaled $1.53 per diluted share in 2014, up from $1.24 per diluted share in 2013.

Corning does not provide explicit revenue or EPS guidance on a quarterly or annual basis. For 1Q15, Optical Communications revenue is forecast to be up more than 10% annually in 1Q15. Environmental is guided flat, though up 5% without currency impact. Specialty Materials revenue is forecast up 10% annually. Within the framework of its revised core currency exchange rate of 99 yen, the company furnished 1Q15 line-item guidance. Core gross margin is forecast at about 43%; core SG&A is forecast at about 13% of revenue, core R&D at about 8%; and the tax rate is about 18%.

Project Phire

On February 6th 2015, Corning unveiled ‘Project Phire’, a glass composite that company claims to be just as strong and drop-resistant as its latest Gorilla Glass but nearly as scratch-resistant as sapphire. Corning decision to blend Gorilla Glass and synthetic sapphire is likely to reduce the threat of its customers switching to sapphire glass manufacturers. Also, a more sapphire-like version of

Gorilla Glass could help Corning play in some markets where sapphire is used today such as camera lenses in some phones including iPhones, Apple’s TouchID buttons and high-end watches and smartwatches all of which use sapphire crystal.

Corning acquired Samsung Electronics’ Fiber Optics Business & TR Manufacturing

This acquisition should provide support to Corning’s Optical Communications segment growth efforts in Asia. Samsung is a trusted provider of optical fiber and cable for customers in South Korea, China and Southeast Asia. Corning integrated Samsung’s fiber optic business, with manufacturing facilities in Gumi, South Korea, as well as in Hainan, China. Corning also acquired TR Manufacturing, a move through which Corning will be able to add TR Manufacturing’s fiber and copper cable/component interconnects and electro-mechanical assemblies, which it sells to OEMs that target various industry segments such as military/defense, security equipment, medical imaging and electronics manufacturing. This also provides Corning access to Hyperscale segment, which is expected to grow at 15% CAGR from 2014 to 2018.

INDUSTRY TRENDS

Demand for larger screen sizes


Market data has shown that customers have a desire for larger screen sizes. This fact is further supported by the recent example of Apple iPhone 6. The Apple IPhone unit sales increased beyond expectations even though the average selling price was increased by around 50 dollars. One reason for the unusual pattern was the increase in screen size. iPhone 6 screen size was 4.7 inch compared to compared to IPhone 5 and 5s which had 4 inch screens.

This love for larger screen size is more prominent in the TV market. According to DispaySearch, the share of LCD TV 50 inches and above is expected to continue its growth in the future. This provides the display industry, the glass and panel makers with a big opportunity that could turn into their main sales driver in the future.

Share of 50’’ and above LCD TV (Millions)


4K Ultra HD TV- Future growth driver

A 4K UHD television set provides 4 times the total display resolution of today’s full HDTV sets by doubling the number of pixels shown horizontally and vertically. It is being seen as the biggest revenue driver for the industry going forward. Looking at the forecasts for 4K Ultra HD TV, it is clear that China is the major market for this technology. In 2013, 0.9 million was the demand for UHD TV in which China accounted for 0.7 million. In 2015, the total demand is expected to rise to 23.3 million and China will make up 57% of this demand, i.e. 13.3 million. The UHD TV shipment in US is also expected to increase.

Source: GfK, TV Demand Projector, December 2014

If the expectation does turn into reality, this will be a major driver for glass substrates industry, as volume shipment will be significantly boosted due to increase in replacement sales. But there are some concerns over the

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2015 4k Ultra HD TV Forecast (Million)

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high prices and lack of content for this technology. Although few studios have already started developing content exclusively for this technology, general expectation is that it would take atleast 2-3 years. Also whether consumers will be convinced enough to switch is yet to be seen. In fact according to a consumer survey conducted by CEA that measured interest in 4K TVs, consumers will need to be convinced to upgrade to these technologies from the HDTVs they already know. Only 26% of the survey respondents said they were interested in 4K technology, while 49% were not interested and 25% were undecided.

Demand for Fiber Optic Solutions

Increasing use of mobile devices, which require efficient data transfer, is boosting demand for efficient networking systems. Also, the growth of cloud environment which boasts of infinite storage and infinite computing leads to greater demand for efficient networking systems.

Another thing to note is the change in data consumption pattern. More data is being used for video content, which creates demand for faster data transfer. Since fibers are much efficient that existing copper-based networks and also support unlimited bandwidth, the demand for optical solutions is particularly strong.

MARKETS AND COMPETITION

Some of the most important success factors for a business in this market include having contacts in key markets, access to the latest and most efficient technology and techniques, establishment of brand names, establishment of export markets, access to skilled workforce and undertaking technical R&D and patent protection.

Over the past five years, the profit margins have gone down for reasons such as weak revenue growth, overcapacity, pressure on average selling prices and restructuring charges. Cost of materials is generally high, but manufacturers with greater scale such as Corning, are likely to be in a better position to negotiate with suppliers on price and may also be in a better position to reduce unit costs.

Competition in this industry is high and the trend is steady. The competition is based on price, brand recognition, innovation and international competition. Innovation is key in this market. Due to changes in customer demand, short product life cycles and fierce competition in this industry, firms must regularly upgrade existing products and successfully develop and introduce new products to remain or become relevant to customers.

Moving forward, we expect Gorilla Glass to remain the preferred choice, especially considering the high cost of production of Sapphire crystals. Barriers to entry in this industry are high. The most important reasons for this is lack of access to technology and intellectual property, lack of large capital and skilled employees and dominance of existing players with brand name recognition.

Corning is the largest worldwide producer of glass substrates for active matrix LCD displays. The environment for LCD glass substrate products is very competitive but Corning has sustained its competitive advantages by investing in new products, providing a consistent and reliable supply, and using its proprietary fusion manufacturing process. Asahi Glass Co. Ltd. and Nippon Electric Glass Co. Ltd. are Corning’s principal competitors in display glass substrates.

Competition within the communications equipment industry is intense among several significant companies. Corning is a leading competitor in the segment’s principal product groups, which include carrier network and enterprise network. The competitive landscape includes

industry consolidation, price pressure and competition for the innovation of new products. These competitive conditions are likely to persist. Corning’s large scale manufacturing experience, fiber process, technology leadership and intellectual property yield cost provide it with edge over several of its competitors. The primary competing producers of the carrier network segment are TE Connectivity Ltd., Prysmian Group, OFS (a Furukawa Company), Fujikura Ltd., Sumitomo Electric and 3M. The primary competitors in enterprise network are TE connectivity, Panduit Corporation and other number of small companies.

For worldwide automotive ceramic substrate products, Corning has a major market position that has remained relatively stable over the past year. Corning has also established a strong presence in the heavy duty and light duty diesel vehicle market. Its competitive advantage in automotive ceramic substrate products for catalytic converters and diesel filter products for exhaust systems is based upon global presence, customer service, engineering design services and product innovation. Corning’s Environmental Technologies products face principal competition from NGK Insulators, Ltd. and Ibiden Co. Ltd. In the Environmental Technologies segment, three customers accounted for 88% of total segment sales in aggregate.

For Specialty Materials segment brand recognition and loyalty, through well-known trademarks are important. Corning Gorilla Glass is a thin-sheet glass that is better able to survive events that most commonly cause glass failure. Its advanced composition allows a deeper layer of chemical strengthening than is possible with most other chemically strengthened glasses, making it both durable and damage resistant. For this segment, Schott, Asahi Glass Co. Ltd., Nippon Electric Glass Co. Ltd. and Heraeus are the main competitors for Corning. In the Specialty Materials segment, three customers accounted for 51% of segment sales in 2014.

For Life Sciences segment, Corning seeks to maintain a competitive advantage by emphasizing product quality, product availability, supply chain efficiency, a wide product line and superior product attributes. Corning’s principle worldwide competitors include Thermo Fisher Scientific, Inc. and Perkin Elmer. Corning also faces increasing competition from large distributors that have pursued backward integration or introduced private label products.

Peer Comparisons

Company Name Ticker

Market Cap (B) ($)

Enterprise Value (B) ($)

Price ($)

EV/ EBITDA EPS($)

P/E NTM P/BK

Corning GLW 31.31 30.88 24.47 8.52 1.55 15.57 1.6

Display & Specialty Materials

Asahi Glass TYO: 5201 7.47 11.61 6.29 6.93 0.21 24.51 0.8

Nippon Electric Glass

TYO: 5214 2.44 2.15 4.90 5.14 0.10 44.94 0.6


TE Connectivity TEL 29.63 32.99 72.38 10.73 4.24 17.27 3.2

3M MMM 108.22 111.74 169.61 12.53 8.19 20.85 8.0

Furukawa Electric Co.

TYO: 5801 1.24 3.81 1.76 10.71 0.07 23.52 0.8

Sumitomo Electric

TYO: 5802 10.26 15.29 12.92 7.2 12.03 10.53 0.9


Ibiden Co. Ltd.

TYO: 4062 2.55 2.32 16.87 4.53 0.95 17.89 0.8

NGK Insulators Ltd.

TYO: 5333 6.33 6.24 19.32 8.97 1.12 17.47 2.0

Life Sciences

Thermo Fisher Scientific, Inc. TMO 52.12 65.33 131.35 15.32 7.34 17.79 2.5

Perkin Elmer, Inc. PKI 5.33 6.21 47.15 13.37 2.61 18.09 2.6

Average 22.56 25.77 9.54 3.69 21.29 2.22

Source: Bloomberg

In its biggest revenue segment Display & Specialty Materials, Corning is the largest company in terms of market cap. It has significantly higher EPS compared to peers in this segment and trades at 15.57x, which is significantly lower that its peers. When compared to peers in Optical Communications segment, Corning appears to be trading at a bargain price. TE Connectivity, Corning’s most comparable competitor in this segment has NTM P/E of 17.27x and P/BK value of 3.2 compared to 1.6 for Corning.

Corning also seems to be trading at cheaper price than its peers in Environmental Technologies segment. Also forward EPS for Corning is higher than Ibiden and NKG Insulators. Corning’s P/E NTM seems to lower than its peers even in Life Sciences segment but forward EPS for its peers, Thermo Scientific and PerkinElmer, is higher.

In Display & Specialty Materials segment, Corning has significantly higher operating margin, net profit margin and return on equity. This could be attributed to its size, its global presence and its product such as Gorilla Glass

which is the preferred glass for device manufacturers and allows them to maintain healthy margins.

Company Name Ticker

Dividend Yield (%)

Operating Income Margin (%)

Net Profit Margin (%)

Net Debt/Equity (%)

Capex/ Sales (%)

ROE (%)

Corning GLW 2.11 19.88 25.45 -12.95 11.08 12.11

Display & Specialty Materials

Asahi Glass TYO: 5201 2.3 4.61 1.18 36.39 8.45 1.44

Nippon Electric Glass

TYO: 5214 2.8 2.07 3.09 -8.34 17.96 1.56


TE Connectivity TEL 1.54 14.54 13.52 36.59 4.84 21.37

3M MMM 2.0 22.42 15.57 26.53 4.69 32.38

Furukawa Electric Co.

TYO: 5801 1.4 2.07 0.15 136.56 4.22 0.69

Sumitomo Electric

TYO: 5802 1.6 4.54 4.12 24.95 5.55 8.90


Ibiden Co. Ltd.

TYO: 4062 1.5 7.35 5.32 -8.43 11.61 4.91

NGK Insulators Ltd.

TYO: 5333 1.1 15.35 12.23 -5.44 9.07 12.00

Life Sciences

Thermo Fisher Scientific, Inc. TMO 0.46 14.82 11.22 64.30 2.53 10.13

Perkin Elmer, Inc. PKI 0.59 9.37 7.05 42.93 1.3 7.82

Average 1.53 9.71 7.35 34.60 7.02 10.12

Source: Bloomberg

TE Connectivity and 3M generate better ROE but they use more leverage as well as shown by Net Debt to Equity ratio. TE Connectivity is set to be Corning biggest competitor moving forward. Overall , we believe Corning is very well positioned in each of their major segment, especially in Display and Specialty materials, to remain one of the most profitable as they are historically have continued to find ways to improve their products, sales and margins despite substantial growth of competition in the last 10 years in the technology sector.

ECONOMIC OUTLOOK

Gross Domestic Product

Many high-income countries continue to struggle with the aftermath of global financial crisis. Recovery in the high-income economies has been uneven, as some countries, such as the United States and the United Kingdom, have exceeded pre-crisis output peaks, but others such as countries in Euro area are still below earlier peaks. Low-

income countries continue to grow at a robust pace, despite a challenging global environment.

Source: World Bank, GEP Forecast January 2015

According to World Bank, global growth is expected to rise in 2015 to 3% and is expected to be at 3.2%-3.3% in 2016-17. U.S. GDP growth was 5% in the third quarter of 2014. We expect the economy to stabilize and predict growth to settle at 3.4% in next six months. Healthy GDP growth is positively correlated with spending in consumer electronics industry and should promote growth in the industry.

Source: World Bank, GEP Forecast January 2015

73% of revenues in 2014 for Corning came from operations in Asia Pacific region. Healthy growth in GDP is expected in the region from 2015 to 2017, which should be increase technology spending across industry as they look to upgrade their IT infrastructure to tap the future growth. Growth in phones, tablets, high end flat panel devices will drive Corning’s earnings in Display Technologies segment. Also, increased sales of automobiles will lead to sales of Corning’s filter products in Environmental Technologies Segment. Optical Communications will continue to benefit from increase in spending in connected devices. Users of these devices will have increasing demand for faster and wider bandwidth that optimizes the connectivity of their devices. As this demand increases, sales of carrier and network inputs, such as optical fiber will grow, especially in emerging markets.

Exchange Rate

Majority of companies in this industry either have foreign operations and/or depend on the foreign market. This makes these companies susceptible to exchange rate volatility. Sales in Display Technologies segment, representing 40% of Corning’s sales in 2014, are denominated in Japanese yen. Corning hedges significant translation, transaction and balance sheet currency exposures and uses a variety of derivative instruments to reduce the impact of foreign currency fluctuations associated with certain monetary assets and liabilities as well as operating results including their net profits. In 2014 Japanese Yen weakened against US dollar and the negative impact of the Japanese yen versus the U.S. dollar exchange rate in 2014 was $373 million. This was offset by the positive net impact of Corning’s yen-denominated hedge programs, driven by the weakening of the Japanese yen in 2014, in the amount of $560 million. Current exchange rate is $1= 119.0 Japanese Yen. We expect the rate to be $1=115.75, six months down the line and $1= 113.58 two years from now. Corning current hedge rate is $1=99 Japanese Yen. Thus, we expect that as long as Corning maintains its hedging policy, it should have positive net impact from Yen-denominated hedge programs. Corning is 100% hedged against yen movements in 2015, 80% hedged for 2016, and 70% hedged for 2017.

CATALYSTS FOR GROWTH

Automobile Glass

Demand of glass in on the up in automobile industry. Automotive electronics is expected to have continued growth. The TFT-LCD shipments for the instrument cluster in automobiles are expected to grow 48% to reach 30.2 million units this year, growing further to reach 50 million units in 2018. In-Car safety innovations will drive expanded use of dashboard screens. Automakers around the world are working to reduce the weight of their vehicles to meet strict mobile emissions regulations. Corning Gorilla Glass for Automotive is now available to help automakers meet this objective by enabling a weight reduction in glazing of more than 50% versus conventional soda lime glass. Corning Gorilla Glass for Automotive can be used in all openings of a vehicle, including windshields, sidelights, sunroofs, and backlights. It can also be used in automotive interior touch panels. If Corning can secure a contract from

certain car manufacturer for Gorilla Glass, that will serve as a long-term driver for the Specialty Material segment.

Innovation

For more than 160 years, Corning has applied its expertise in specialty glass, ceramics, and optical physics to develop products that have created new opportunities. Although Corning’s overall spending level for research, development and engineering decreased slightly from 9% of sales in 2013 to 8% of sales in 2014, it maintained its innovation strategy focused on growing its existing businesses, developing opportunities adjacent or closely related to its existing technical and manufacturing capabilities, and investing in long-range opportunities in each of its market segments.

All of its segments continue to work on new products, including glass substrates for high performance displays and LCD applications, precision glass for advanced displays, emissions control products for cars, trucks, and off-road vehicles, products that accelerate drug discovery and manufacturing and the optical fiber, cable and hardware and equipment that enable fiber-to-the-premises, and next generation data centers. In addition, it is focusing on wireless solutions for diverse venue applications, such as distributed antenna systems, fiber-to-the cell site and fiber-to-the antenna. Corning has focused its research, development and engineering spending to support the advancement of new product attributes for its Corning Gorilla Glass suite of products. We expect Corning to continue to focus on adjacent glass opportunities which leverage existing materials or manufacturing processes, including Corning® Willow™ Glass, its ultra-slim flexible glass substrate for use in next-generation consumer electronic technologies.

INVESTMENT POSITIVES

• Increase in TV sizes drove glass market in 2014, with screen sizes of 50-inch and more growing as much as 50%. We expect the trend to continue. We expect price declines to remain moderate going forward. The ultra high-definition televisions which have higher average screen size, higher resolution and more pixels will become a major growth driver of the glass market. This will improve Corning’s dollar content from Display Technologies segment.

• Increasing use of connected devices, emergence of cloud environment and change in pattern of data consumption (around 50% data used for video content) will promote demand for efficient network. Global data is estimated at 4.4 trillion Gigabytes and is expected to double every year. Number of connected devices is expected to reach 19 billion mark by 2018. Wireless Distributed Antenna Systems are expected to grow at 14% CAGR from 2014 to 2018. Data centers are expected to grow at 10% CAGR from 2014 to 2018. Fiber–to–the-home (FTTH) network is growing at 9%. We expect these factors to drive Corning’s growth in next few years.

• Growth possibilities in automotive market. There has been increasing trend of use of Gorilla Glass in automobile industry, which is believed to be 7 billion market. Corning Gorilla Glass for automotive can be used in all openings of a vehicle, including windshields, sidelights, sunroofs, and backlights. It can also be used in automotive interior touch panels. If Corning can secure a contract from certain car manufacturer for Gorilla Glass, that will serve as a long-term driver for the Specialty Material segment.

• Emissions standards are becoming stricter in many areas of the world due to environmental concerns like global warning and pollution. Corning has a broad portfolio of products which reduce the output of emissions in vehicles and thus will benefit from both increase in number of vehicles and stricter restrictions.

INVESTMENT NEGATIVES

• Continued pricing pressure in LCD industry. Due to consumers’ trend of shifting to lower end devices in emerging markets, there is constant pricing pressure on devices manufactures, who then transfer this pressure on panel makers and glass manufacturers in order to save margins. This decline in average selling prices offsets the growth in volume shipments and restricts the revenue upside for Display Technologies segment.

• Treat of breakthrough innovations. Although Gorilla Glass is currently market’s preferred choice, any breakthrough innovations such as sapphire can compromise its competitive advantage and result in loss of contracts and market share for Display and Specialty Materials segments.

• Weaker demand for ultra high-definition television. Weaker than expected demand for ultra high-definition TV

could result in loss of capacity and resources and lead to decline in prices due to excess supply.

VALUATION

Our investment thesis is the outcome if careful analysis of Corning, Inc. as a company, its segments’ industries, macro-economic outlook, and preparation of detailed financial modeling. In this part of the report we will discuss the key assumptions behind our financial model and investment thesis.

After a strong result in 2014 for Display Technologies segment, mainly due to the inorganic growth of consolidating Corning Precision Materials, we expect revenue for this segment to decline by 2% in 2015. We expect Corning’s LCD market share in terms of % of revenue to remain steady and increase gradually from 4.65% in 2015 to 4.71% in 2020. We expect the total number of LCD shipments to increase at 1.61% CAGR from 2015 to 2020 and average LCD price per shipment to increase at 1.11% CAGR from 2015 to 2020. We expect revenue for this segment to increase at 3% CAGR from 2015 to 2020.

Optical Communication is the segment we are most positive about. We expect revenues from this segment to grow by 10% in 2015. We expect this segment to grow at 4% CAGR from 2015-2020. Global demand for network is on the rise and it will drive demand for Corning’s optical fiber solutions. Growing number of heavy duty and light duty vehicles and tighter emission regulations will drive growth for Environmental Technologies segment. We expect the revenues in 2015 to increase by 1%, after major part of it will be offset by decline in Euro. Without foreign currency effects the growth would have been 6%. We expect this segment to grow at 3% CAGR from 2015-2020.

Corning released Gorilla Glass 4 in November 2014 and due to its recent release the price should not decline in 2015. Gorilla Glass remains the preferred choice in the market. Thus, we expect 10% growth in the revenue of Specialty Materials segment in 2015. Over the period of 2015-2020, we expect this segment to grow at 4.5% CAGR. We expect the revenue from Life Sciences to grow by 2% in 2015. We expect this segment to grow at 1.7% CAGR from 2015-2020. Also Corning’s earnings from Dow Corning is expected to go up by 10% due to increase in demand of Polysillicone. We expect the total revenue to increase at 3.04% CAGR from 2015 to 2020. Considering

both sides, Corning being a market leader for majority of its segments especially Display Technologies and the cyclical nature of the industry, we believe that long term growth rate 3.5% would be appropriate.

We expect cost of goods sold (COGS) in 2015 to decrease by 1.28% with respect to revenue, as display segment will benefit from synergies from complete consolidation of Corning Precision Materials. We expect COGS to increase at 1.93% CAGR from 2015 to 2020. Historically R&D for Corning has decreased year-over-year as % of sales. We expect the R&D for 2015 would be consistent with, management guidance of 8% of sales. We expect R&D to increase at 3.04% CAGR from 2015 to 2020. We expect SG&A to remain steady to decline slightly year-over-year with respect to revenue, as compared to historical average. We expect SG&A to increase at 1.36% CAGR from 2015 to 2020. We expect net income to increase at 3.49% CAGR from 2015 to 2020. We expect earnings per share to increase at 4.97% CAGR from 2015 to 2020.

Management has described the current level of Capital Expenditures to be at a maintaining level as a result of increased expenditures in previous periods. The management guidance for 2015 was 1.3-1.4 billion. We expect strong growth in multiple segments which will require increased capacity and large capital expenditures. Going forward and anticipating the coming wave of UHD TV, Corning will need to increase capital expenditures.

We compared 1 year, 2 year, 3 year, 4 year and 5 year weekly data from Bloomberg. The 3 year raw Beta of 1.45 seemed to be a reasonable estimate. Risk premium of 4.85% was used, which is an average of 87 years geometric average of stock return in excess of the 30-year Treasury bond yield, and Damodaran’s equity premium calculated monthly as at March, 1 2015. Return on 30 year US treasury rate of 2.71% was used as proxy for risk free rate.

We used Discounted Cash Flow (DCF), Economic Profit (EP), and Dividend Discount Model (DDM) to come up with our price of $24.36 for DCF and $20.97 for DDM. From our calculations we recommend HOLD rating for Corning Inc. (GLW) with a mean target price of $25, which provides 8.23% upside from its current market price of $23.10.

KEYS TO MONITOR

We will provide Corning a SELL rating if it is not able to maintain its market share for LCD TV. Also if the volume

shipment do not increase as projected we would consider selling, as the decline in average selling price is expected to be a continual trend in this industry.

On the other hand, if car manufacturers start using specialty materials such as Corning Gorilla Glass in their new models, this would open up a new market for Corning believed to be worth $7 billion. In this instance we would recommend a BUY for this stock.

REFERENCES

1) Corning, Inc. 10-K 2014, 2013, 2012, 2010, 2008, 2006

2) Stricter Emission Standards and Growing Automobile Sales to

Drive Corning's Environmental Technologies Business

http://www.forbes.com/sites/greatspeculations/2014/02/19/st

ricter-emission-standards-and-growing-automobile-sales-to-

drive-cornings-environmental-technologies-business/

3) Capacity Expansion Will Likely Help Corning Cater to Growing

Demand for Emission Filters

http://www.forbes.com/sites/greatspeculations/2014/11/20/c

apacity-expansion-will-likely-help-corning-cater-to-growing-

demand-for-emission-filters/

4) Corning Watch: Sapphire threat to Gorilla Glass dims http://www.stargazette.com/story/news/local/2014/12/31/coring-gorilla-glass-sapphire-apple-iphone/21115817/

5) Next –Generation TVs and Displays by Robert E. Calem

6) Corning® Gorilla® Glass for Automotive Receives BMW Supplier Innovation Award

http://www.corning.com/news_center/news_releases/2014/2014100701.aspx

7) Flat Panel Display Area Demand Growing Rapidly, According to HIS http://www.displaysearch.com/cps/rde/xchg/displaysearch/hs.xsl/150129_flat_panel_display_area_demand_growing_rapidly.asp

8) LCD TV Shipment Forecast Revised Upward on Strong Consumer Demand for Larger Sizes, DisplaySearch Reports

http://www.displaysearch.com/cps/rde/xchg/displaysearch/hs.xsl/141231_lcd_tv_shipment_forecast_revised_upward_on_strong_consumer_demand_for_larger_sizes.asp

http://www.forbes.com/sites/greatspeculations/2014/02/19/stricter-emission-standards-and-growing-automobile-sales-to-drive-cornings-environmental-technologies-business/



http://www.forbes.com/sites/greatspeculations/2014/11/20/capacity-expansion-will-likely-help-corning-cater-to-growing-demand-for-emission-filters/



http://www.stargazette.com/story/news/local/2014/12/31/coring-gorilla-glass-sapphire-apple-iphone/21115817/

http://www.stargazette.com/story/news/local/2014/12/31/coring-gorilla-glass-sapphire-apple-iphone/21115817/



http://www.displaysearch.com/cps/rde/xchg/displaysearch/hs.xsl/150129_flat_panel_display_area_demand_growing_rapidly.asp






9) In-Car Safety Innovations Drive Expanded Use of Dashboard Screens, DisplaySearch Reports

http://www.displaysearch.com/cps/rde/xchg/displaysearch/hs.xsl/141124_in_car_safety_innovations_drive_expanded_use_of_dashboard_screens.asp

10) S&P Capital IQ report

11) Factset Research Systems

12) Bloomberg

13) Factiva

14) UHD Resolution Displays Lead Growth in Global Broadcast and Production Display Category, According to NPD DisplaySearch http://www.displaysearch.com/cps/rde/xchg/displaysearch/hs.xsl/140610_uhd_resolution_displays_lead_growth_in_global_broadcast_and_production_display_category.asp

15) 4Kx2K TVs: Will They Stimulate or Slow the Market? – Paul Gray

16) Strong LCD, 4K UHD sales drive bump in global TV shipments - Jim O’Neill

IMPORTANT DISCLAIMER

Henry Fund reports are created by student enrolled in the Applied Securities Management (Henry Fund) program at the University of Iowa’s Tippie School of Management. These reports are intended to provide potential employers and other interested parties an example of the analytical skills, investment knowledge, and communication abilities of Henry Fund students. Henry Fund analysts are not registered investment advisors, brokers or officially licensed financial professionals. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Henry Fund may hold a financial interest in the companies mentioned in this report.




http://www.displaysearch.com/cps/rde/xchg/displaysearch/hs.xsl/140610_uhd_resolution_displays_lead_growth_in_global_broadcast_and_production_display_category.asp



Revenue Breakdown – Display Technologies Segment

Year 2015E 2016E 2017E 2018E 2019E 2020E

Display TechnologiesCorning LCD market share % of revenue 4.65% 4.66% 4.67% 4.68% 4.70% 4.71%

Total number of LCD shipments (Millions) 2500 2551 2592 2640 2684 2708

Average LCD price per shipment 32.47$ 33.02$ 33.40$ 33.70$ 34.00$ 34.30$

Total 3774 3925 4043 4164 4289 4375

Corning Incorporated

Revenue Decomposition

Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E

Display Technologies 2909 2545 3851 3774 3925 4043 4164 4289 4375 4462

YoY Growth -7.5% -12.5% 51.3% -2.0% 4.0% 3.0% 3.0% 3.0% 2.0% 2.0%

Telecommunications / Optical Communications* 2130 2326 2652 2917 3063 3186 3281 3347 3380 3414

YoY Growth 2.8% 9.2% 14.0% 10.0% 5.0% 4.0% 3.0% 2.0% 1.0% 1.0%

Optical fiber and cable / Carrier Network* 1619 1782 2036 2280 2417 2538 2627 2679 2706 2733

YoY Growth 4.0% 10.1% 15.0% 12.0% 6.0% 5.0% 3.5% 2.0% 1.0% 1.0%

Hardware and Equipment / Enterprise Network* 511 544 616 637 646 648 654 667 674 681

YoY Growth -1.0% 6.5% 13.2% 3.4% 1.4% 0.3% 1.0% 2.0% 1.0% 1.0%

Environmental Technologies 964 919 1092 1103 1125 1170 1205 1241 1266 1291

YoY Growth -3.4% -4.7% 18.8% 1.0% 2.0% 4.0% 3.0% 3.0% 2.0% 2.0%

Automotive 486 485 528 549 577 611 636 661 681 701

YoY Growth 2.1% -0.2% 22.0% 4.0% 5.0% 6.0% 4.0% 4.0% 3.0% 3.0%

Diesel 478 434 564 554 548 559 569 580 585 590

YoY Growth -8.4% -9.2% 30.0% -1.8% -1.0% 1.9% 1.9% 1.9% 0.9% 0.8%

Specialty Materials 1346 1170 1205 1326 1418 1475 1534 1595 1643 1693

YoY Growth 25.3% -13.1% 3.0% 10.0% 7.0% 4.0% 4.0% 4.0% 3.0% 3.0%

Life Sciences 657 851 862 879 897 915 933 952 961 971

YoY Growth 10.4% 29.5% 1.3% 2.0% 2.0% 2.0% 2.0% 2.0% 1.0% 1.0%

All Other 6 8 53 37 33 32 33 32 33 33

YoY Growth 0.0% 33.3% 562.5% -30.0% -10.0% -5.0% 3.0% -2.0% 2.0% 2.0%

Total Revenues 8012 7819 9715 10036 10461 10820 11150 11456 11658 11864

Y/Y Revenue Growth 1.5% -2.4% 24.2% 3.3% 4.2% 3.4% 3.1% 2.7% 1.8% 1.8%

*In 2013, Corning Inc. changed the name of this segment

from 'Telecommunications' to 'Optical Commuications' .

They also changed the names & method of reporting for the

sub-segments & restated 2011 & 2012 revenues.


Income Statement


Net sales 8012 7819 9715 10036 10461 10820 11150 11456 11658 11864

Total cost of sales 4693 4495 5663 5720 5963 6059 6244 6301 6295 6407

Depreciation Expense 978 971 1167 1120 1149 1178 1204 1227 1249 1271

Cost of sales excluding depreciation 3715 3524 4496 4600 4814 4881 5040 5074 5047 5136

Gross margin 3319 3324 4052 4315 4498 4761 4906 5155 5363 5458

Operating Expenses

Selling, general & administrative expenses 1205 1126 1211 1204 1255 1298 1338 1375 1282 1305

Research, development & engineering expenses 769 710 815 803 837 866 892 916 933 949

Amortization of purchased intangibles 19 31 33 33 32 32 32 32 32 32

Restructuring, impairment & other charges (credits) 133 67 71 46 167 32 134 160 64 65

Asbestos litigation charge (credit) 14 19 (9) 9 9 10 11 12 13 13

Operating income (loss) 1179 1371 1931 2220 2198 2522 2499 2660 3039 3093

Equity in earnings of affliliated companies 810 547 266 201 209 216 223 229 233 237

Interest income 14 8 26 25 27 30 33 36 40 44

Interest expense (111) (120) (123) (136) (143) (139) (151) (143) (155) (149)

Other income (expense), net 83 667 1468 1359 1260 1181 1125 1077 590 545

Income (loss) before income taxes 1975 2473 3568 3669 3551 3810 3729 3859 3747 3770

Provision (Benefit) for income taxes 339 512 1096 1004 942 866 669 745 583 593

Net income (loss) 1636 1961 2472 2665 2609 2945 3060 3114 3164 3177

Year end shares outstanding 1494 1452 1358 1308 1282 1259 1245 1239 1219 1200

Net income (loss) per share - basic 1.10 1.35 1.82 2.04 2.04 2.34 2.46 2.51 2.60 2.65

Total dividends declared 500 583 755 830 799 900 928 939 965 968

Dividends declared per common share 0.32 0.39 0.52 0.61 0.61 0.70 0.74 0.75 0.78 0.79

Dividends payout ratio 0.29 0.29 0.29 0.30 0.30 0.30 0.30 0.30 0.30 0.30


Balance Sheet


Current Assets

Cash & cash equivalents 4988 4704 5309 5837 5964 6972 7937 8938 9071 9637

Short-term investments, at fair value 1156 531 759 835 918 1010 1111 1222 1345 1479

Total cash, cash equivalents & short-term investments 6144 5235 6068 6672 6882 7982 9048 10160 10416 11116

Trade accounts receivable, net 1302 1253 1501 1528 1674 1569 1516 1867 1795 1827

Total Inventories 1051 1270 1322 1334 1465 1655 1494 1466 1574 1602

Deferred income taxes 579 278 248 248 248 248 248 248 248 248

Other current assets 619 855 1099 1064 1078 1093 1126 1157 1201 1222

Total current assets 9695 8891 10238 10846 11346 12547 13433 14899 15234 16015

Investments 4915 5537 1801 1981 2179 2397 2637 2901 3191 3510

Property, net of accumulated depreciation 10625 9801 12766 12445 12763 13092 13380 13634 13874 14120

Goodwill 974 1002 1150 1150 1150 1150 1150 1150 1150 1150

Other intangible assets 522 540 497 502 513 487 479 475 472 469

Deferred income taxes 2343 2234 1889 1889 1889 1889 1889 1889 1889 1889

Other assets 301 473 1722 853 785 649 468 390 525 534

Total assets 29375 28478 30063 29665 30624 32211 33436 35337 36334 37686

Current Liabilities

Current portion of long-term debt 76 21 36 36 71 257 3 253 0 0

Accounts payable 779 771 997 1024 1057 1060 1082 1180 1177 1198

Other accrued liabilities 359 370 1291 643 659 685 728 761 783 794

Total current liabilities 1956 1746 2324 1703 1787 2002 1812 2194 1961 1992

Long-term debt 3382 3272 3227 3405 3263 3369 3438 3461 3573 3678

Postretirement benefits other than pensions 930 766 814 783 778 766 763 770 692 679

Other non-current liabilities 903 793 2046 1082 1088 1114 1126 1134 1131 1151

Total liabilities 7842 7267 8411 6973 6916 7252 7139 7559 7357 7499

Shareholder's Equity

Convertible preferred stock - - 2300 2300 2300 2300 2300 2300 2300 2300

Common stock and Additional paid in capital 13971 13897 14292 14498 14703 14909 15114 15421 15421 15421

Retained earnings (accumulated deficit) 10588 11320 13021 14856 16666 18712 20843 23019 25218 27427

Treasury stock, at cost (2773) (4099) (6727) (7727) (8727) (9727) (10727) (11727) (12727) (13727)

Accumulated other comprehensive income (loss) (300) 44 (1307) (1307) (1307) (1307) (1307) (1307) (1307) (1307)

Total Corning Incorporated shareholders' equity 21486 21162 21579 22619 23636 24887 26224 27706 28904 30114

Minority / Noncontrolling interests 47 49 73 73 73 73 73 73 73 73

Total equity 21533 21211 21652 22692 23709 24960 26297 27779 28977 30187

Total liabilities and Equity 29375 28478 30063 29665 30624 32211 33436 35337 36334 37686


Cash Flow Statement

Fiscal Years Ending Dec. 31 2012 2013 2014

Cash Flows from Operating Activities

Net income (loss) 1728 1961 2472

Depreciation 978 971 1167

Amortization of purchased intangibles 19 31 33

Asbestos litigation (credits) charges - - -

Restructuring, impairment & other charges (credits) 133 67 71

Loss (gain) on repurchases & retirement of debt 26 - -

Stock compensation charges 70 54 58

Loss (gain) on sale of business - -

Undistributed earnings of affiliated companies less than (in excess of) dividends received280 83 1438

Deferred tax provision (benefit) 68 189 612

Interest expense on convertible debentures - - -

Restructuring payments (15) (35) (39)

Cash received from settlement of insurance claims - - -

Restricted cash - - -

Income tax refund - - -

Credits issued against customer deposits - - -

Employee benefit payments less than (in excess of) expense 36 52 (52)

Unrealized gains on translated earnings contracts - (367) (938)

Contingent consideration fair value adjustment (249)

Trade accounts receivable (272) (29) (16)

Inventories (23) (247) 2

Other current assets (81) 34 (16)

Accounts payable & other current liabilities 189 (23) (3)

Other adjustments, net 70 46 169

Net cash flows from operating activities 3206 2787 4709

Cash Flows from Investing Activities

Capital expenditures (1801) (1019) (1076)

Acquisitions of businesses, net of cash received (723) (68) 66

Net proceeds from sale of businesses - - -

Net proceeds (payments) from sale or disposal of assets - - -

Investment in affiliates (111) - -

Investment in unconsolidated entities - (526) (109)

Net increase (decrease) in long-term investments & other long-term assets - - -

Short-term investments - acquisitions (2270) (1406) (1398)

Short-term investments - liquidations 2269 2026 1167

Premium on purchased collars - (107) -

Realized gains on translated earnings contracts - 87 361

Restricted investments - liquidations - - -

Other investing activities, net 8 9 27

Net cash flows from investing activities (2628) (1004) (962)

Cash Flows from Financing Activities

Net repayments of short-term borrowings & current portion of long-term debt (26) (71) (52)

Proceeds from unwind of interest rate swap agreements - -

Proceeds from issuance of long-term debt, net 1362 248 -

Proceeds from issuance of short-term debt, net 29

Proceeds (payments) from the settlement of interest rate swap agreements (18) 33 -

Proceeds received for asset financing & related incentives, net - 276 1

Retirements of long-term debt, net (280) (498) -

Principal payments under capital lease obligations (1) (7) (6)

Payments to acquire noncontrolling interest - (47) -

Proceeds from issuance of preferred stock, net - - 400

Proceeds from issuance of common stock, net - - -

Proceeds from the exercise of stock options 38 85 116

Repurchases of common stock for treasury (720) (1516) (2483)

Dividends paid (472) (566) (591)

Cash dividends paid to preferred & common shareholders - - -

Other financing activities, net 2 - -

Net cash flows from financing activities (115) (2063) (2586)

Effect of exchange rates on cash (136) (4) (556)

Net increase (decrease) in cash & cash equivalents 327 (284) 605

Cash & cash equivalents at beginning of year 4661 4988 4704

Cash & cash equivalents at end of year 4988 4704 5309


Cash Flow Statement Forecast

Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E 2020E 2021E

Cash Flows from Operating Activities

Net Income (loss) 2665 2609 2945 3060 3114 3164 3177

Depreciation & Amortization 1153 1181 1210 1236 1259 1281 1303

Changes in Working Capital Accounts:

Change in Accounts Receivables (27) (146) 105 52 (351) 72 (32)

Change in Inventories (12) (131) (191) 161 28 (107) (28)

Change in Other Current Assets 35 (14) (15) (33) (31) (44) (21)

Change in Deferred Taxes 0 0 0 0 0 0 0

Change in Accounts Payable 27 33 4 21 98 (3) 21

Change in Accrued Compensation and Other Liabilities (648) 16 26 43 33 22 10

Change in Income Taxes Payable 0 0 0 0 0 0 0

Change in Other Non-Current Liabilities (964) 5 26 12 8 (3) 20

Net cash flows from operating activities 2230 3554 4110 4552 4159 4382 4450

Cash Flows from Investing Activities

(Increase) Decrease in short-term investments (76) (83) (92) (101) (111) (122) (134)

(Increase) Decrease in long-term investments (180) (198) (218) (240) (264) (290) (319)

Capital Expenditures (Change in gross PPE) (832) (1499) (1539) (1524) (1513) (1521) (1548)

Change in intangible assets (5) (11) 26 7 4 3 4

Change in goodwill 0 0 0 0 0 0 0

(Increase) Decrease in other assets 869 68 135 181 79 (135) (9)

Net cash flows from investing activities (223) (1723) (1688) (1677) (1805) (2065) (2007)

Cash Flows from Financing Activities

Proceeds from issuance of ST debt 0 35 186 (254) 250 (253) 0

Proceeds from issuance of long-term debt 178 (142) 106 69 23 112 105

Payment of Dividends (830) (799) (900) (928) (939) (965) (968)

Proceeds from issuance of convertible preferred stock 0 0 0 0 0 0 0

Proceeds from issuance of common stock 206 206 206 206 306 0 0

Post-Retirement Liability other than pensions (31) (4) (12) (3) 7 (77) (14)

Payments of Asbestos Litigation Liability 0 0 0 0 0 0 0

Repurchases of common stock (1000) (1000) (1000) (1000) (1000) (1000) (1000)

Changes in accumulated other comprehensive income 0 0 0 0 0 0 0

Net cash flows from financing activities (1478) (1705) (1414) (1911) (1353) (2183) (1877)

Change in Cash 528 126 1008 965 1001 133 566

Cash and cash equivalent, beginning of the period 5309 5837 5964 6972 7937 8938 9071

Cash and cash equivalent, ending of the period 5837 5964 6972 7937 8938 9071 9637


Common Size Income Statement


Net sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Cost of sales 58.57% 57.49% 58.29% 57.00% 57.00% 56.00% 56.00% 55.00% 54.00% 54.00%

Depreciation Expense (% of Net PPE) 9.20% 9.91% 9.14% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00%

Cost of sales excluding depreciation 46.37% 45.07% 46.28% 45.84% 46.02% 45.11% 45.20% 44.29% 43.29% 43.29%

Gross margin 41.43% 42.51% 41.71% 43.00% 43.00% 44.00% 44.00% 45.00% 46.00% 46.00%

Operating Expenses

Selling, general & administrative expenses 15.04% 14.40% 12.47% 12.00% 12.00% 12.00% 12.00% 12.00% 11.00% 11.00%

Research, development & engineering expenses 9.60% 9.08% 8.39% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00%

Amortization of purchased intangibles 0.24% 0.40% 0.34% 0.33% 0.31% 0.30% 0.29% 0.28% 0.27% 0.27%

Restructuring, impairment & other charges (credits) 1.66% 0.86% 0.73% 0.46% 1.60% 0.30% 1.20% 1.40% 0.55% 0.55%

Asbestos litigation charge (credit) 0.17% 0.24% -0.09% -0.09% -0.09% -0.09% -0.09% -0.09% -0.09% -0.09%

Operating income (loss) 14.72% 17.53% 19.88% 22.12% 21.01% 23.31% 22.41% 23.22% 26.06% 26.07%

Equity in earnings of affliliated companies 10.11% 7.00% 2.74% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00%

Interest income 0.23% 0.13% 1.02% 0.97% 0.97% 0.97% 0.97% 0.97% 0.97% 0.97%

Interest expense -3.21% -3.64% -3.77%

Other income (expense), net 1.04% 8.53% 15.11% 13.54% 12.05% 10.91% 10.09% 9.41% 5.06% 4.60%

Income (loss) before income taxes 24.65% 31.63% 36.73% 36.55% 33.94% 35.22% 33.44% 33.68% 32.14% 31.78%

Provision (Benefit) for income taxes 4.23% 6.55% 11.28% 10.00% 9.00% 8.00% 6.00% 6.50% 5.00% 5.00%

Net income (loss) 20.42% 25.08% 25.45% 26.55% 24.94% 27.22% 27.44% 27.18% 27.14% 26.78%


Common Size Balance Sheet (% of Sales)


Current Assets

Cash & cash equivalents 62.26% 60.16% 54.65% 58.17% 57.01% 64.44% 71.18% 78.02% 77.81% 81.23%

Short-term investments, at fair value 4.15% 1.81% 2.67%

Total cash, cash equivalents & short-term investments 76.68% 66.95% 62.46% 58.17% 57.01% 64.44% 71.18% 78.02% 77.81% 81.23%

Trade accounts receivable, net 16.25% 16.03% 15.45% 15.22% 16.00% 14.50% 13.60% 16.30% 15.40% 15.40%

Total Inventories 13.12% 16.24% 13.61% 13.29% 14.00% 15.30% 13.40% 12.80% 13.50% 13.50%

Deferred income taxes 7.23% 3.56% 2.55% 2.47% 2.37% 2.29% 2.22% 2.16% 2.13% 2.09%

Other current assets 7.73% 10.93% 11.31% 10.60% 10.30% 10.10% 10.10% 10.10% 10.30% 10.30%

Total current assets 121.01% 113.71% 105.38% 99.75% 99.68% 106.63% 110.51% 119.38% 119.14% 122.52%

Investments 17.65% 18.85% 6.32%

Property, net of accumulated depriciation 132.61% 125.35% 131.41% 124.00% 122.00% 121.00% 120.00% 119.01% 119.01% 119.01%

Goodwill 12.16% 12.81% 11.84% 11.46% 10.99% 10.63% 10.31% 10.04% 9.86% 9.69%

Other intangible assets 6.52% 6.91% 5.12% 5.00% 4.90% 4.50% 4.30% 4.15% 4.05% 3.95%

Deferred income taxes 29.24% 28.57% 19.44% 18.82% 18.06% 17.46% 16.94% 16.49% 16.20% 15.92%

Other assets 3.76% 6.05% 17.73% 8.50% 7.50% 6.00% 4.20% 3.40% 4.50% 4.50%

Total assets 366.64% 364.22% 309.45% 267.53% 263.13% 266.22% 266.26% 272.47% 272.76% 275.59%

Current Liabilities

Current portion of long-term debt 3.21% 0.62% 1.10%

Accounts payable 9.72% 9.86% 10.26% 10.20% 10.10% 9.80% 9.70% 10.30% 10.10% 10.10%

Other accrued liabilities 4.48% 4.73% 13.29% 6.41% 6.30% 6.33% 6.53% 6.64% 6.72% 6.69%

Total current liabilities 24.41% 22.33% 23.92% 16.61% 16.40% 16.13% 16.23% 16.94% 16.82% 16.79%

Long-term debt 15.36% 14.08% 13.88% 14.19% 14.19% 14.19% 14.19% 14.19% 14.19% 14.19%

Postretirement benefits other than pensions 77.18% 68.03% 67.22% 65.00% 62.00% 59.00% 57.00% 56.00% 54.00% 52.00%

Other non-current liabilities 11.27% 10.14% 21.06% 10.79% 10.40% 10.30% 10.10% 9.90% 9.70% 9.70%

Total liabilities 97.88% 92.94% 86.58% 106.58% 102.99% 99.62% 97.52% 97.03% 94.71% 92.68%

Shareholder's Equity

Convertible preferred stock - - 23.67% 22.92% 21.99% 21.26% 20.63% 20.08% 19.73% 19.39%

Common stock & Additional paid-in capital 174.38% 177.73% 147.11% 144.46% 140.55% 137.79% 135.56% 134.61% 132.28% 129.98%

Retained earnings (accumulated deficit) 132.15% 144.78% 134.03% 148.03% 159.31% 172.94% 186.94% 200.93% 216.31% 231.17%

Treasury stock, at cost -34.61% -52.42% -69.24% -76.99% -83.42% -89.90% -96.21% -102.37% -109.17% -115.70%

Accumulated other comprehensive income (loss) -3.74% 0.56% -13.45% -13.02% -12.49% -12.08% -11.72% -11.41% -11.21% -11.02%

Total Corning Incorporated shareholders' equity 268.17% 270.65% 222.12% 225.38% 225.93% 230.01% 235.19% 241.84% 247.93% 253.82%

Minority / Noncontrolling interests 0.59% 0.63% 0.75% 0.73% 0.70% 0.67% 0.65% 0.64% 0.63% 0.62%

Total equity 268.76% 271.28% 222.87% 226.11% 226.63% 230.69% 235.85% 242.48% 248.56% 254.43%

Total liabilities and Equity 366.64% 364.22% 309.45% 295.59% 292.74% 297.71% 299.88% 308.46% 311.66% 317.64%


Value Driver Estimation


Revenue 8012 7819 9715 10036 10461 10820 11150 11456 11658 11864

Less: Cost of Goods Sold 3715 3524 4496 4600 4814 4881 5040 5074 5047 5136

Less: Selling, General & Administrative Exp. 1205 1126 1211 1204 1255 1298 1338 1375 1282 1305

Less: Depreciation Expense 978 971 1167 1120 1149 1178 1204 1227 1249 1271

Less: Research and Development Exp. 769 710 815 803 837 866 892 916 933 949

Less: Amortization of Purchasesd Intangibles 19 31 33 33 32 32 32 32 32 32

EBITA 1326 1457 1993 2275 2374 2565 2644 2832 3116 3171

Plus: Operating Lease Interest 7 7 8 8 8 9 9 9 9 9

Adjusted EBITA 1333 1464 2001 2283 2383 2573 2653 2841 3125 3181

Adjusted Taxes

Marginal Tax Rate (from 10k) 32.40% 27.50% 31.60% 32.16% 32.16% 32.16% 32.16% 32.16% 32.16% 32.16%

Income Tax Provision 339 512 1096 1004 942 866 669 745 583 593

Plus: Tax Shield on Operating Lease Interest 2 2 3 3 3 3 3 3 3 3

Plus: Tax Shield on Interest Expense 36 33 39 44 46 45 49 46 50 48

Less: Tax on Interest/Investment Income 5 2 8 8 9 10 11 12 13 14

Plus: Tax Shield on Restructuring 43 18 22 15 54 10 43 52 21 21

Less: Tax on Non-Operating Income 289 334 548 502 473 449 433 420 265 252

Equity in Earnings of Affiliated Comp. 262 150 84 65 67 70 72 74 75 76

Other Income 27 183 464 437 405 380 362 347 190 175

Plus: Tax Shield on Asbestos Litigation 5 5 (3) 3 3 3 4 4 4 4

Total Adjusted Taxes 131 234 601 558 566 468 323 417 383 404

Change in Deferred Taxes 178 410 375 0 0 0 0 0 0 0

NOPLAT 1380 1639 1775 1725 1817 2106 2330 2424 2742 2777

Invested Capital

Operating Current Assets

Plus: Normal Cash 801 782 972 1004 1046 1082 1115 1146 1166 1186

Plus: Account Receivable 1302 1253 1501 1528 1674 1569 1516 1867 1795 1827

Plus: Inventory 1051 1270 1322 1334 1465 1655 1494 1466 1574 1602

Plus: Other Current Assets 619 855 1099 1064 1078 1093 1126 1157 1201 1222

Total Operating Current Assets 3773 4160 4894 4929 5262 5399 5252 5636 5736 5837

Operating Current Liabilities

Plus: Account Payable 779 771 997 1024 1057 1060 1082 1180 1177 1198

Plus: Total Accrued Expenses 819 815 1291 643 659 685 728 761 783 794

Accrued Wages 460 445 - 0 0 0 0 0 0 0

Other Accrued Liabilities 359 370 1291 643 659 685 728 761 783 794

Plus: Asbestos Litigation - - - - - - - - - -

Plus: Customer Deposits - - - - - - - - - -

Plus: Income Taxes Payable 282 139 - 0 0 0 0 0 0 0

Total Operating Current Liabilities 1880 1725 2288 1667 1716 1745 1809 1941 1961 1992

Net Operating Working Capital 1893 2435 2606 3262 3546 3654 3442 3695 3775 3845

Plus: Net PPE 10625 9801 12766 12445 12763 13092 13380 13634 13874 14120

Plus: PV of Operating Leases 179 162 202 197 202 207 212 216 220 224

Plus: Non-Goodwill Intangible Assets 522 540 497 502 513 487 479 475 472 469

Plus: Other LT Operating Assets 301 473 1722 853 785 649 468 390 525 534

Less: Customer Deposits - - - - - - - - - -

Less: Other Operating Liabilities 903 793 2046 1082 1088 1114 1126 1134 1131 1151

Invested Capital 12617 12618 15747 16177 16721 16975 16856 17276 17735 18040

VALUE DRIVERS

NOPLAT 1380 1639 1775 1725 1817 2106 2330 2424 2742 2777

Beginning Invested Capital 11758 12617 12618 15747 16177 16721 16975 16856 17276 17735

Return on Invested Capital (ROIC) 11.74% 12.99% 14.07% 10.96% 11.23% 12.59% 13.73% 14.38% 15.87% 15.66%

Beginning Invested Capital 11758 12617 12618 15747 16177 16721 16975 16856 17276 17735

ROIC-WACC 2.95% 4.21% 5.29% 2.17% 2.45% 3.81% 4.94% 5.59% 7.09% 6.87%

Economic Profit (EP) 347 531 667 342 396 637 839 943 1224 1219

NOPLAT 1380 1639 1775 1725 1817 2106 2330 2424 2742 2777

Change in Invested Capital 859 1 3129 430 544 254 (119) 420 459 305

Free Cash Flow 521 1639 (1354) 1296 1273 1852 2449 2003 2283 2472


Weighted Average Cost of Capital (WACC) Estimation

Risk-free rate 2.71%

Market Risk Premium 4.85%

Equity Beta of Firm 1.45

Cost of Equity (Re) 9.74%

YTM Corporate Bond- exp 2042 4.17%

Cost of Debt (Rd) 4.17%

MV of Common Stock 24.62

Shares Outstanding 1358 In Millions

Weight of Equity 35733.96

PV of Operating Leases 202.29

Current Portion of LT Debt 36

Market Value of LT Debt 3227

Convertible Preffered Stock 2300 In Millions

Total Debt 5765.29

Re 9.74%

Rd 4.17%

E 35733.96 WACC= 8.79%

D 5765.292

V 41499.25

(1-t) 68.40%

Wd 13.89%

We 86.11%

Weight of Debt (D)

WACC= Re(E/V)+Rd(1-t)(D/V)+Rpfd(PFD/V)

WACC Calculation

WACC= Re(E/V)+Rd(1-t)(D/V)+Rpfd(PFD/V)

Cost of Equity (Re)

Cost of Debt (Rd)

Weight of Equity (E)


Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs:

CV Growth 3.50%

CV ROIC 15.87%

WACC 8.79%

Cost of Equity 9.74%

Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E

DCF Model

Free Cash Flow 1296 1273 1852 2449 2003

Contiuing Value 40439

Periods to Discount 1 2 3 4 5

Discounted FCF 1191 1075 1438 1749 27858

Sum of DCF's 33311

Plus: Excess Cash 4338

Plus: Short term investments 759

Plus: Long term investments 1801

Less: Total Debt (including PV OL) 5765

Less: ESOP 341

Less: Post Retirement benefit 814

Less: Asbestos Liability 681

Value of Equity 32608

Shares Outstanding 1358

Share Price 24.01

Price Today 24.54

EP Model

Invested Capital 15746.8

EP 342 396 637 839 943

Continuing Value 23163

Periods to Discount 1 2 3 4 5

Discounted EP 314 334 495 599 15822

Sum EP 17564

Beginning Invested Capital 15747

Plus: Excess Cash 4338

Plus: Short term investments 759

Plus: Long term investments 1801

Less: Total Debt (including PV OL) 5765

Less: ESOP 341

Less: Post Retirement benefit 814

Less: Asbestos Liability 681

Value of EP 32608

Share Outstanding 1358

Share Price 24.01

Price Today $24.54


Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E 2020E

EPS 2.04 2.04 2.34 2.46 2.51 2.60

Key Assumptions

CV growth 3.50%

CV ROE 11.39%

Cost of Equity 9.74%

Future Cash Flows

P/E Multiple (CV Year) 11.10

EPS (CV Year) 2.60

Future Stock Price 28.81

Dividends Per Share 0.61 0.61 0.70 0.74 0.75

1 2 3 4 5

Discounted Cash Flows 0.56 0.51 0.53 0.51 18.57

Intrinsic Value 20.68$

Pice Today 21.13$


Relative Valuation Models

EPS EPS Est. 5yr

Ticker Company Price 2015E 2016E P/E 15 P/E 16 EPS gr. PEG 15 PEG 16

MMM 3M $169.61 $8.19 $9.00 20.4 18.8 9.0 2.27 2.09

ENS ENERSYS $65.42 $4.30 $4.68 15.2 14.0 13.0 1.17 1.08

TEL TE CONNECTIVITY $72.38 $4.22 $4.59 17.2 15.8 11.4 1.50 1.38 APH Amphenol Corp. $56.80 $2.48 $2.72 22.9 20.9 10.0 2.29 2.09

Average 18.9 17.4 1.8 1.7

GLW Corning Incorporated $24.62 $2.04 $2.04 12.1 12.1 6.67 1.8 1.8

Implied Value:

Relative P/E (EPS15) $ 38.54

Relative P/E (EPS16) 35.36$

PEG Ratio (EPS15) 24.56$

PEG Ratio (EPS16) 22.53$


Key Management Ratios


Liquidity Ratios

Current Ratio 4.96 5.09 4.41 6.37 6.35 6.27 7.41 6.79 7.77 8.04

= Current Assets/ 9695 8891 10238 10846 11346 12547 13433 14899 15234 16015

Current Liabilities 1956 1746 2324 1703 1787 2002 1812 2194 1961 1992

Quick Ratio 4.42 4.36 3.84 5.59 5.53 5.44 6.59 6.12 6.97 7.24

=(Current Assets-Inventory)/ 8644 7621 8916 9512 9881 10892 11939 13433 13660 14413


Cash Ratio 3.14 3.00 2.61 3.92 3.85 3.99 4.99 4.63 5.31 5.58

=(Cash + Short-Term or Marketable Securities )/ 6144 5235 6068 6672 6882 7982 9048 10160 10416 11116


Activity or Asset-Management Ratios

Inventory Turnover 4.47 3.54 4.28 4.29 4.07 3.66 4.18 4.30 4.00 4.00

=Cost of Goods Sold/ 4693 4495 5663 5720 5963 6059 6244 6301 6295 6407

Inventory 1051 1270 1322 1334 1465 1655 1494 1466 1574 1602

Receivables Turnover 6.15 6.24 6.47 6.57 6.25 6.90 7.35 6.13 6.49 6.49

=Sales/ 8012 7819 9715 10036 10461 10820 11150 11456 11658 11864

Account Receivable 1302 1253 1501 1528 1674 1569 1516 1867 1795 1827

Total Assets Turnover 0.27 0.27 0.32 0.34 0.34 0.34 0.33 0.32 0.32 0.31

=Sales/ 8012 7819 9715 10036 10461 10820 11150 11456 11658 11864

Total Assets 29375 28478 30063 29665 30624 32211 33436 35337 36334 37686

Financial Leverage Ratios

Debt/Equity 0.36 0.34 0.39 0.31 0.29 0.29 0.27 0.27 0.25 0.25

=Total Liabilities/ 7842 7267 8411 6973 6916 7252 7139 7559 7357 7499

Total Equity 21533 21211 21652 22692 23709 24960 26297 27779 28977 30187

Debt Ratio 0.27 0.26 0.28 0.24 0.23 0.23 0.21 0.21 0.20 0.20

=Total Liabilities/ 7842 7267 8411 6973 6916 7252 7139 7559 7357 7499

Total Assets 29375 28478 30063 29665 30624 32211 33436 35337 36334 37686

Interest Coverage Ratio 10.62 11.43 15.70 16.32 15.32 18.14 16.53 18.53 19.62 20.76

=Opearating Income/ 1179 1371 1931 2220 2198 2522 2499 2660 3039 3093

Interest Expense 111 120 123 136 143 139 151 143 155 149

Profitability Ratios

Net Profit Margin 20.42% 25.08% 25.45% 26.55% 24.94% 27.22% 27.44% 27.18% 27.14% 26.78%

=Net Income/ 1636 1961 2472 2665 2609 2945 3060 3114 3164 3177

Net Sales 8012 7819 9715 10036 10461 10820 11150 11456 11658 11864

Return on Assets 5.57% 6.89% 8.22% 8.98% 8.52% 9.14% 9.15% 8.81% 8.71% 8.43%

=Net Income/ 1636 1961 2472 2665 2609 2945 3060 3114 3164 3177

Total Assets 29375 28478 30063 29665 30624 32211 33436 35337 36334 37686

Return on Equity 7.60% 9.25% 11.42% 11.74% 11.01% 11.80% 11.64% 11.21% 10.92% 10.53%

=Net Income/ 1636 1961 2472 2665 2609 2945 3060 3114 3164 3177

Total Equity 21533 21211 21652 22692 23709 24960 26297 27779 28977 30187

Payout Policy Ratios

Dividend Payout Ratio 0.31 0.30 0.31 0.31 0.31 0.31 0.30 0.30 0.31 0.30

=Dividends/ 500 583 755 830 799 900 928 939 965 968

Net Income 1636 1961 2472 2665 2609 2945 3060 3114 3164 3177

Total Payout Ratio 0.76 0.97 1.37 0.69 0.69 0.65 0.63 0.62 0.62 0.62

=Dividends + Repurchases / 1249 1909 3383 1830 1799 1900 1928 1939 1965 1968

Net Income 1636 1961 2472 2665 2609 2945 3060 3114 3164 3177

24.54 2.75% 3.00% 3.25% 3.50% 3.75% 4.00% 4.25% 4.50% 24.54 2.75% 3.00% 3.25% 3.50% 3.75% 4.00% 4.25% 4.50%

8.49% 24.38 24.89 25.45 26.06 26.74 27.49 28.34 29.29 10.00% 25.66 26.18 26.74 27.36 28.04 28.79 29.63 30.56

8.59% 23.93 24.42 24.94 25.52 26.16 26.87 27.67 28.55 10.50% 25.02 25.52 26.06 26.66 27.31 28.03 28.83 29.73

8.69% 23.50 23.96 24.46 25.01 25.61 26.28 27.02 27.86 11.00% 24.38 24.86 25.38 25.95 26.58 27.27 28.03 28.89

WACC 8.79% 23.09 23.52 23.99 24.51 25.08 25.71 26.41 27.19 SG&A (2015) 11.50% 23.74 24.20 24.70 25.24 25.84 26.50 27.24 28.06

8.89% 22.68 23.10 23.55 24.04 24.57 25.17 25.82 26.56 12.00% 23.11 23.54 24.02 24.54 25.11 25.74 26.44 27.22

8.99% 22.29 22.69 23.11 23.58 24.08 24.64 25.26 25.95 12.50% 22.47 22.88 23.33 23.83 24.37 24.97 25.64 26.39

9.09% 21.92 22.29 22.69 23.13 23.61 24.14 24.72 25.37 13.00% 21.83 22.22 22.65 23.12 23.64 24.21 24.84 25.55

9.19% 21.55 21.91 22.29 22.70 23.16 23.66 24.21 24.81 13.50% 21.19 21.56 21.97 22.42 22.91 23.45 24.05 24.72

14.00% 20.55 20.90 21.29 21.71 22.17 22.68 23.25 23.88

24.54 2.75% 3.00% 3.25% 3.50% 3.75% 4.00% 4.25% 4.50% 24.54 2.75% 3.00% 3.25% 3.50% 3.75% 4.00% 4.25% 4.50%

1.30 25.92 26.53 27.20 27.94 28.77 29.70 30.74 31.93 6.00% 25.66 26.18 26.74 27.36 28.04 28.79 29.63 30.56

1.35 24.91 25.46 26.05 26.71 27.44 28.25 29.16 30.19 6.50% 25.02 25.52 26.06 26.66 27.31 28.03 28.83 29.73

1.40 23.98 24.46 24.99 25.58 26.22 26.94 27.74 28.63 7.00% 24.38 24.86 25.38 25.95 26.58 27.27 28.03 28.89

BETA 1.45 23.11 23.54 24.02 24.54 25.11 25.74 26.44 27.22 R&D (2015) 7.50% 23.74 24.20 24.70 25.24 25.84 26.50 27.24 28.06

1.49 22.45 22.85 23.29 23.76 24.28 24.85 25.48 26.19 8.00% 23.11 23.54 24.02 24.54 25.11 25.74 26.44 27.22

1.55 21.53 21.89 22.27 22.68 23.13 23.63 24.17 24.78 8.50% 22.47 22.88 23.33 23.83 24.37 24.97 25.64 26.39

1.60 20.82 21.14 21.48 21.85 22.25 22.69 23.18 23.71 9.00% 21.83 22.22 22.65 23.12 23.64 24.21 24.84 25.55

1.65 20.15 20.44 20.75 21.08 21.44 21.83 22.26 22.73 9.50% 21.19 21.56 21.97 22.42 22.91 23.45 24.05 24.72

1.7

24.54 2.75% 3.00% 3.25% 3.50% 3.75% 4.00% 4.25% 4.50% 24.54 2.75% 3.00% 3.25% 3.50% 3.75% 4.00% 4.25% 4.50%

55.00% 25.66 26.18 26.74 27.36 28.04 28.79 29.63 30.56 120.00% 23.53 23.98 24.48 25.01 25.60 26.26 26.98 27.79

55.50% 25.02 25.52 26.06 26.66 27.31 28.03 28.83 29.73 121.00% 23.43 23.87 24.36 24.89 25.48 26.13 26.85 27.65

COGS (2015) 56.00% 24.38 24.86 25.38 25.95 26.58 27.27 28.03 28.89 122.00% 23.32 23.76 24.25 24.77 25.36 26.00 26.71 27.51

56.50% 23.74 24.20 24.70 25.24 25.84 26.50 27.24 28.06 123.00% 23.21 23.65 24.13 24.66 25.23 25.87 26.57 27.36

57.00% 23.11 23.54 24.02 24.54 25.11 25.74 26.44 27.22 PPE ( % of sales) 124.00% 23.11 23.54 24.02 24.54 25.11 25.74 26.44 27.22

57.50% 22.47 22.88 23.33 23.83 24.37 24.97 25.64 26.39 125.00% 23.00 23.43 23.90 24.42 24.98 25.61 26.30 27.08

58.00% 21.83 22.22 22.65 23.12 23.64 24.21 24.84 25.55 126.00% 22.89 23.32 23.79 24.30 24.86 25.48 26.17 26.94

58.50% 21.19 21.56 21.97 22.42 22.91 23.45 24.05 24.72 127.00% 22.78 23.21 23.67 24.18 24.74 25.35 26.03 26.80

59.00% 20.55 20.90 21.29 21.71 22.17 22.68 23.25 23.88 128.00% 22.68 23.10 23.56 24.06 24.61 25.22 25.90 26.65

CV GROWTH

CV GROWTH

CV GROWTH

CV Growth CV GROWTH

CV GROWTH

corning, inc. glw fin

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