What's the idea?
In Q2 2024, Corning reported an adjusted earnings per share (EPS) of $0.47, a 4.4% increase from the previous year, in line with analysts' expectations of $0.45. Revenue grew slightly by 0.3% to $3.25 billion, missing analysts' estimates of $3.58 billion. Despite mixed results, the management remains optimistic, citing strong adoption of Corning’s new optical connectivity products for generative AI and a new agreement with Lumen Technologies. Corning has shown a recovery in net sales growth rates, with quarterly sales up 0.2% YoY in Q2 2024, compared to a 6.4% YoY decline in Q1 2024. However, the company is sacrificing margins in favor of business expansion. Its gross margin fell from 31.2% in Q2 2023 to 29.2% in Q2 2024, while its operating margin decreased from 8.6% to 5.7% over the same period.
Management also provided guidance for Q3 2024 results, expecting core non-GAAP revenue to grow to $3.7 billion and adjusted EPS to be in the range of $0.50 to $0.54. The sequential revenue increase is primarily driven by continued adoption of new optical connectivity products for generative AI in optical communications. In addition, Corning plans to add more than $3 billion in annual revenue over the next three years, targeting approximately $15.6 billion in annual revenue by 2026, representing a compound annual growth rate (CAGR) of 7.4%. However, Corning's current valuation appears high, with a TTM EV/EBITDA ratio of 16.84x, compared to a five-year average of 10.96x, and a TTM P/E ratio of 63.36x, compared to a five-year average of 32.33x. Based on these metrics, Corning currently appears to be overvalued.
We recommend buying PUT options on GLW shares with a strike price of $40 and an expiration date of 15/11/2024. The option will cost about $2.20, while one contract will cost around $220, since options are traded for 100 shares. Clients who are more optimistic about the possible GLW stock price dynamics and are willing to take a bullish position can purchase CALL options with a strike price of $40 and an expiration date of 15/11/2024. The option will cost about $2.45, while one contract will cost around $245.
About Company
Corning Inc. (GLW) is a manufacturer of electronic components used in a wide range of applications. The company’s product portfolio includes glass for notebook computers, desktop flat panel displays, display televisions, carrier network and enterprise network products, ceramic substrates for gasoline and diesel engines, and other products. It operates through the following segments: Optical Communications, Display Technologies, Specialty Materials, Environmental Technologies and Life Sciences. Corning was founded in 1851 and is headquartered in Corning, USA.
Why do we like PUT OPTION GLW.US @40?
Corning Inc. (GLW) is a manufacturer of electronic components used in a wide range of applications. The company’s product portfolio includes glass for notebook computers, desktop flat panel displays, display televisions, carrier network and enterprise network products, ceramic substrates for gasoline and diesel engines, and other products. The company has 124 manufacturing facilities in 15 countries and operates in five reportable segments: Optical Communications, Display Technologies, Specialty Materials, Environmental Technologies and Life Sciences.
Corning's expertise in manufacturing glass substrates for flat panel displays, including liquid crystal displays (LCDs) and organic light-emitting diodes (OLEDs), and optical fiber and cables, makes its Optical Communications and Display Technologies segments the major revenue drivers for the company. In 2023, the Optical Communications segment accounted for 30% of Corning's total revenue, while the Display Technologies segment contributed 26%, resulting in a combined 56% share of the company’s total revenue.
Corning’s 2023 revenue breakdown by segment
In Q2 2024, Corning reported quarterly adjusted EPS of $0.47 per share, a 4.4% increase from the same quarter last year when the company reported EPS of $0.45. The result appeared to be in line with analysts polled by Capital IQ who expected $0.47. Moreover, revenue for the quarter grew slightly by 0.3% YoY to $3.25 billion, which missed analysts' expectations of $3.58 billion. Despite mixed results, the management remains optimistic, citing strong adoption of Corning’s new optical connectivity products for generative AI and a new agreement with Lumen Technologies.
Moreover, although Corning expects revenue to continue growing in H2 2024, its margins are declining. The company's quarterly revenue increased 0.2% YoY in Q2 2024, a significant improvement from a 6.4% YoY decline in Q1 2024. However, its quarterly gross profit fell 6.3% YoY and operating profit plummeted 33.3% YoY in Q2 2024. As a result, gross margin declined from 31.2% in Q2 2023 to 29.2% in Q2 2024, while operating margin decreased from 8.6% to 5.7% over the same period. Thus, despite revenue growth opportunities, the company needs to demonstrate cost efficiencies and margin improvements to reassure investors of genuine progress in its business.
Corning quarterly revenue dynamics
The management has also presented its forecast for Q3 2024 results: core, non-GAAP sales are expected to grow to approximately $3.7 billion with adjusted EPS in the range of $0.50 to $0.54. The sequential increase in sales was primarily driven by the continued adoption of new optical connectivity products for generative AI in optical communications, which more than offset the expected slowdown in the North American Class 8 truck market. Management also highlighted that the company already has the necessary production capacity and technical capabilities in place, with costs and investments reflected in the financials.
These positive results support Corning’s plan to add more than $3 billion in annualized sales over the next three years. However, despite outlining encouraging figures, these plans suggest that by 2026, Corning will earn about $15.6 billion in annual revenue, representing a CAGR of just 7.4%.
Corning historical multiples
Corning’s current valuation appears quite high and does not correspond to the future growth rates that seem to be already priced into the current stock price. TTM EV/EBITDA ratio stands at 16.84x, compared to the five-year average of 10.96x in 2023. Similarly, the TTM P/E ratio is 63.36x versus a five-year average of 32.33x in 2023. Additionally, given the expected $15.6 billion in annual revenue, the forward EV/Sales ratio is approximately 2.90x, which is considerably lower than the current 3.58x. Therefore, based on these multiples and growth assumptions, we believe that Corning seems to be overvalued at present.
How to use the idea
We recommend buying PUT options on GLW shares with a strike price of $40 and an expiration date of 15/11/2024. The option will cost about $2.20, while one contract will cost around $220, as options are traded for 100 shares.
The investor will make a profit if the price of the underlying asset will be below the breakeven point* of $37.80 on the expiration day. The lower the GLW stock price declines below this mark, the greater the profit will be. We recommend closing the position when the cost of the option reaches $5.00. In this case, the profit will be 127%.
If, on the expiration day, the price of the underlying asset is below $40 but above $37.8 the investor will incur a limited loss. If the price of the underlying asset will be above $40, the investor will incur a maximum loss of $220.
The chart below shows the distribution of profits and losses from the option position depending on the GLW stock price on the expiration date.
Bullish view on the stock and CALL options
It cannot be ruled out that some positive corporate events could lead to an increase in the stock price. If you have a bullish view on the company, you can buy CALL options with a strike price of $40 and an expiration date of 15/11/2024. The option will cost about $2.45, while one contract will cost around $245.
If, on the expiration day, the price of the underlying asset is above the breakeven point of $42.45, the potential profit is infinite.
If, on the expiration day, the price of the underlying asset is above $40 but below $42.45 the investor will incur a limited loss. If the price of the underlying asset is below $40, the investor will incur a maximum loss of $245.
Important note
Options must be purchased with a limit order. Buying an option contract with a market order can result in extremely unfavorable prices.
This is a speculative investment idea which carries increased risks. Investing in options can provide a 50%, 100%, 200%, and in some cases even higher returns, but also can lead to a complete loss of the amount invested! In cases where volatility is low, profit or loss can vary between 20% and 30%.
A prudent approach to implementing option ideas is to invest a small portion of the portfolio in many such cases. In this way, losses from unsuccessful ideas will be compensated by high returns on successful investments.
Key risks
There is a possibility that a strong earnings report could lead to a rise in the GLW stock price. In this case, the PUT options would lose value, while the CALL options would increase. Relatively low volatility in GLW stock may result in the options becoming devalued by the expiration date.