Lab Deal Adds Life to Corning's Glass House (Update 1)
(Corning deal story, updated to include analyst comment and financial data)
NEW YORK ( TheStreet) -- Corning(GLW) , the world's largest supplier of glass for flat-panel television sets, is continuing to diversify into the life sciences business, buying the majority of Becton Dickinson's (BDX) laboratory products unit, called Discovery Labware, for $730 million in cash. Corning is banking on growth in its life sciences division as a way to drive overall revenue to $10 billion over the next few years.
The diversification by way of deal-making couldn't come at a better time for Corning as pressures in the glutted LCD market intensify. A drop in demand for flatscreen TVs, a core earnings driver for Corning, resulted in electronics giant Sony(SNE) announcing a record loss on Tuesday. Also on Tuesday, LCD TV maker Sharp increased its annual loss forecast to $4.67 billion.
In 2011, profits at Corning's display technologies unit fell over 20% to $2.3 billion, driving overall profits down by roughly the same amount, even as revenue increased to a record $7.9 billion.
Corning expects that Discovery Labs will add roughly $235 million in revenue to the company's Corning life sciences division, growing revenue by 40% to over $800 million in 2012 and to $1 billion by 2014.
The move may help Corning achieve its revenue forecast in coming years through a mix of acquisitions and organic growth, but just as important in the deal is adding to the company's longer-term cash flow profile, says an analyst.
"Although short-term investors will likely focus on the net negative impact to free cash flow for 2012, we believe longer-term investors will consider the impact to free cash flow in 2013 and beyond," notes Sterne Agee analyst Andrew Huang, who rates shares a buy with a $16 price target.
Corning said that Tuesday's move will add to earnings per share in 2013 and will benefit earnings by 5 cents in 2016, when the integration is expected to be completed. Corning also said it will maintain a share repurchase program and will consider adding to dividends, even as it invests in growth in coming years.
"We do not think the acquisition will impact Corning's ability to move ahead with shareholder friendly distributions," adds Huang.
Corning's focus on growing its specialty businesses is expected to continue as quarterly and annual profits slumped on declining in earnings from the company's display technologies unit, which supplies glassware to LCD TV manufacturers like Sony. Other units like its specialty materials business supply mobile device makers like Apple(AAPL) .
Corning's makes the "Gorilla Glass" casing for Apple's iPhone and iPad screens. That relationship with Apple has steadied oveall sales, but Tuesday's acquisition signals that even Apple isn't enough of an earnings ballast to keep management from seeking additional diversification.