Corning to Shatter Your Dreams

 | Mar 08, 2012 | 7:37 AM EST  | Comments
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When Corning (GLW) reported its fiscal fourth quarter in late January, the company shattered investor's dreams. While the company beat the Street's consensus estimate by $0.08, it got ugly the more you poked around the income statement. Can Corning move higher or is the stock shattered?

On the surface, it seemed like a decent quarter. Corning reported fourth-quarter revenue of $1.89 billion, up 6.9% year over year. Glass volumes at the company's display technology division, moreover, were up 4%. The numbers declined 7% sequentially at the company's Precision LCD joint venture with Samsung, but that was in line with management's previous (lowered) guidance. Sales in the telecommunication segment increased 10.6% from a year earlier, and the specialty materials division saw its number jump 20.6%.

But, as investors studied the income statement further, they discovered a lot of broken pieces. Gross margins, for example, fell 341 basis points from the September quarter because of lower glass volumes and aggressive pricing. Management said it expects to get more aggressive on price in order to stem market share losses. Operating expenses rose 20% sequentially because of higher selling, general and administrative (SG&A) costs.

In addition, pro forma net income fell 13% year over year to $633 million. Earnings per share were boosted by a much-lower-than-expected tax rate. On top of all that, most analysts are expecting just 2% revenue growth for fiscal 2012.

While the stock is considered a "value play" by many investors, I believe Corning is a typical supplier in the tech food chain that's trapped in a supply-chain nightmare. Unless you trade names like Corning, you never make any money. The profits in tech go to those who are closer to the end user: the closer to the end user, the more profit.

Corning is stuck in the middle, fighting it out with dozens of other suppliers. It's forced to increase spending on research and development in order to lower costs and find higher value-added items to sell in order to protect profits. Meanwhile, pricing and gross margins are eroding on their older products.

It's quite a mess, if you ask me. Could you ride the stock higher on a trade? Sure you could. But who knows when that will happen? For the stock to move higher on a longer-term basis, gross margins would have to bounce back, glass volumes would need to increase and operating expenses would have to fall. In my view, Corning will only break your heart and shatter your dreams.

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