Corning Breaks From Reality Versus Expectations (GLW)

October 24, 2007 by Douglas A. McIntyre

Corning Inc. (NYSE:GLW) is feeling the wrath of a sloppy earnings report today.  The earnings report for the quarter was fin as it posted $0.38 EPS on a 9.5% revenue gain to $1.55 Billion versus estimates of $0.37 EPS and $1.55 Billion revenues.  The problem is in the guidance.  It now sees Q4 at $0.36 to $0.38 EPS on $1.5 to $1.55 Billion in revenues, but consensus is $0.39 EPS and $1.63 Billion in revenues.

Display Technologies’ glass volume increased 15% and Samsung CorningPrecision’s volume increased 14% compared to quarter two. Pricedeclines in the quarter were in line with previous quarters.

Sequentially,telecommunications sales increased 8% (10%* excluding the impact of thedivestiture of the company’s submarine cabling business in the secondquarter).

Its Environmental Technologies segment sales in thethird quarter were $198 million, a 4% sequential increase and a 29%increase over the third quarter 2006. Corning’s Life Sciences segmenthad sales of $78 million, remaining even with last quarter, and 15%higher than a year ago.

For the coming quarter:

  • Display volume is expected to be up 2% to 5% sequentially, and consistent with the overall glass market growth.
  • Telecommunications sales are expected to decline about 10% sequentially, in line with normal seasonal patterns.
  • Sequential LCD volume is expected to increase in the range of 2% to 5%and its wholly owned business is on track to increase volume 37% to 38%for the full year. To meet this level of demand, the companyanticipates running its operations at full capacity in the fourthquarter. Sequential price declines are again expected to be in linewith previous quarters.
  • Environmental Technologies segment salesare expected to decline about 10% sequentially, and increase about 15%versus the fourth quarter 2006.  Sales for the Life Sciences segmentare expected to decline slightly on a sequential basis and be even withthe fourth quarter 2006.  Those two combined life sciences andenvironmental sales may be part of the problem here.  Those should beincreasing rather than decreasing unless the company can demonstratethat it is a from a seasonal slowdown of budgets being extinguished.

James B. Flaws, vice chairman & CFO, said “The overall displaymarket appears healthy heading into the fourth quarter. Retail marketindicators continue to point toward a strong consumer holiday buyingseason for electronic goods such as LCD televisions, laptop computersand flat screen monitors. We currently see no evidence of creditconcerns in the U.S. impacting consumers’ purchasing decisions.”  Onceagain, there may be a break here in the commentary of reality versusinternal expectations.

Looking forward to 2008, Flaws saidthat Corning’s current view is that the LCD glass market will expand byat least 400 million square feet, driven primarily by the growth of LCDtelevision demand. This square-footage growth is similar to thatexperienced in both 2006 and 2007. Corning intends to continue itscurrent pricing strategy in 2008.  Something isn’t accurate there, orat least it may be sugar-coated.

Shares closed at $24.74yesterday, but are trading down 5% at $23.47 in pre-market trading. Its52-week trading range is $18.12 to $27.25. If storage sales are strong,PC sales are strong, laptop sales are strong, software sales arestrong, and processor sales are strong…. then what the hellhappened?  This is a head scratcher, and it gives you the conclusionthat its lead and near monopoly position may no longer be the same asin prior years.  The company is maintaining its consistent growth for2008.  There is a divergence here between commentary and reality.

Thereis another issue that must be a factor besides environmental and seasonal telecom sales: Aspeople upgrade their PC’s to multi-core processors, they must not beupgrading their flat panel screens at quite the same rates.  There mustbe some better explanation in this morning’s conference call.

On a final glance at what the company said in August was taken wornglyby the analysts.  It appeared that the company was being conservative,but now it looks liek they were just being honest.  The large drop onbig volume last Friday could have been thought of as "market relatedpanic selling," but now it looks like the gig was up.  The chart wasactually weak, and now we’ll have to see if that 200 day moving averageof $23.65 will become resistance rather than support.  Sometimes thosetechnicians are just smarter than everyone else.  Itcan probably beexpected that there will be some downgrades from bulge bracketbrokerage firms on this.

Jon C. Ogg
October 24, 2007