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.

"The Discovery Labware unit's extensive product portfolio and established dealer network will significantly improve Corning life sciences' offerings to customers and is a critical part of Corning's long-term growth strategy," Corning CEO Wendell Weeks said in a statement.

As part of the deal, Corning will integrate four Discovery Labware divisions that make labware like petri dishes, liquid handling products, culturewares and ADME research, into the company's life sciences business. Those businesses are expected to earn a profit of roughly 27 cents a share in 2012, adding to Corning's overall earnings per share, though the company did not quantify the earnings impact.

"Life Sciences is an attractive growth industry and has low capital intensity. We expect this acquisition to provide a stable stream of incremental cash flow to Corning as we become a more balanced company," added Corning chairman and CFO James Flaws.

Corning shares were waffling in Tuesday trading at $13.41, though shares have gained close to 4% year-to-date. Still, the company's shares are off over 30% in the last 12 months.

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Overall, analysts give Corning shares an average price target of $15.90 a share on 17 "buy" recommendations, six "holds" and 3 "sells," according to data compiled by Bloomberg. Those analysts expect Corning's profits to fall to $2 billion, even as revenue grows to $8 billion in 2012.

Weak flatscreen television demand has hit electronics retailers, television set manufacturers and large industry suppliers, leading to the steep decline in Corning shares in the past year. While companies like Sony expect a 2012 reversal, Corning's earnings may face continued pressure, according to analyst estimates.

In fourth-quarter earnings, Corning's profit dropped 53% and the company said it would lower capacity in its LCD glass business, on pricing pressures and end market weakness.

This week, Sony announced 10,000 layoffs, or 6% of its global workforce as its annual loss slipped to a record $6.4 billion. Falling demand for Sony's money losing flatscreen TV products has been spurred by consumers moving to mobile devices.

For medical device maker Becton Dickinson, the sale of its biosciences unit will help the company focus on its recent acquisitions like Carmel Pharma and newly launched instrumentation products. Meanwhile, the company will retain its advanced bioprocessing business and it will record a gain on the sale, according to a press release.

The divestiture may have been a coup for Becton Dickinson, allowing it to focus on high growth core businesses, even if it dilutes earnings in the short term. "We believe BD was able to secure what we consider to be a great valuation for the no growth (recently declining) non-core business," wrote Deutsche Bank analyst Kristen Stewart in a Tuesday note. Stewart notes that the businesses that Becton Dickinson is exiting aren't as fast growing as the advanced bioprocessing unit that the Franklin Lakes, N.J.-based company will retain.

For more on the medical equipment sector, see why Roche's hostile takeover bid for Illumina ( ILMN) started a new sequence in April. See a list of Apple's suppliers for more on Corning's relationship with the iPad maker.

-- Written by Antoine Gara in New York

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