For months on end, Corning (NYSE: GLW ) investors have been treated to an uninterrupted stream of good news out of HQ. Until it got, well, interrupted. Let me tell you how it is.
Strolling down memory lane
Let's start with April, the month in which Corning reported its latest set of boffo earnings. Sales raced ahead 24% in comparison to the previous year's Q1, while earnings outdid even that feat, more than tripling to hit $0.64 per share. And management promised more good news to come. Forecasting into Q2, Corning predicted we would see LCD glass sales rise 6% to 9% sequentially, sales jump another 20%, and profits land somewhere between $0.47 and $0.50 per share (before items).
The merry month of May
Fast-forward a month, and Corning CEO Wendell Weeks confirmed that sales and earnings were both on track. What's more, CFO Jim Flaws' controversial assertion that "historically, TV sales are not usually affected by recessions" was proving correct. Weeks confirmed that "LCD TV unit sales in the U.S. have been up at least 30% year over year for each of the first four months of this year and are expected to continue to be strong."
Same tune in June
Simon & Garfunkel's assertions notwithstanding, Corning did not change its tune in June.
To the contrary, Flaws bubbled with good news: "So far this year, we are not seeing evidence of the economic downturn impacting our forecasted growth" of "25% to 30% year-over-year ... In fact, the evidence we have shows that May LCD TV sales in the U.S. increased nearly 50% over a year ago." Furthermore, "our conversations with ... the panel manufacturers, indicate that their inventories are at very reasonable levels as the supply chain prepares for seasonally robust second-half demand." Meanwhile: "Corning's display facilities continue to operate at full capacity ... and our customers are also running at high utilization rates."
And then came July. First, AU Optronics (NYSE: AUO ) reported lower-than-expected revenues for June. Then LG Display (NYSE: LPL ) warned that LCD "demand will be soft in July and August and panel prices will continue to fall." Third in line came Sony (NYSE: SNE ) , which on Thursday announced that demand for large-screen LCD TVs is so much less than expected that it's been forced to cut production at one of its U.S. plants. Contradicting Weeks' assertion of "reasonable" inventory levels among Corning customers, Sony warned that it has to work down some of its "accumulated inventory."
So who didn't get the memo?
Now, as I have said before, I have great respect for Corning and its plain-speaking ways. This is not a company -- and not a CEO -- that "spins" its news, but rather one that lays out the facts and tells us like it (thinks it) is. So in my Foolish opinion, what we're seeing among the panel makers is less a repudiation of Corning's sunny talk, and more a warning that things have shifted quite suddenly in this market.
For the record, this seems to be the opinion in professional analyst circles as well. RBC Capital Markets was recently quoted affirming that this quarter got off to a "strong start ... for LCD TVs." Nonetheless, "the follow through may not have been there during the latter part of the month." Thomas Weisel echoes the fear, telling us it sees "softening demand and a rising supply demand imbalance, particularly evident in the dramatic drop in panel shipments and prices in June and early July."
Now, it's worth bearing in mind that AU Optronics and LG Display are far from the whole of Corning's customer base. This company is more than just LCDs -- with diesel engine parts, optical fiber, and even medical products in its bag of tricks, Corning makes more products than you can shake a stick at, and sells them to everyone from Dow Chemical (NYSE: DOW ) to D.R. Horton (NYSE: DHI ) to Hyundai to Verizon (NYSE: VZ ) .
Still, the fact remains that LCD glass is Corning's biggest revenue driver, and by far its most profitable segment. And AU Optronics and LG Display are two key Corning customers, now both on record warning of a slowdown. Sony may or may not use Corning glass (it's not named as a customer in Corning's 10-K), but its slowing of production suggests the problem is spread across this industry.
What it all adds up to, in my view, is this: Corning's second fiscal quarter ended on June 30. Most customers and commentators are saying the LCD TV supply imbalance didn't really become apparent until late in that month, or early this month. Thus, I expect that when Corning reports its earnings on July 30, the numbers will be fully as superb as Corning has led us to believe.
The problem, if there is one, will be with guidance. Be prepared.
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