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Corning Cowed

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Three months ago, following Corning's (NYSE: GLW  ) Q1 earnings announcement, I almost bought the stock. Despite my many years of nonstop skepticism, the company's improving free cash flow performance had me all but ready to become a Corning bull.

Well, so much for that idea. After crunching the numbers from Corning's Q2 earnings report, I'm afraid I'll have to send Corning's bull-thesis back to the corral.

On the face of it, Corning's report wasn't so bad. Total volume at the unit that makes glass for LCD televisions rose 5% sequentially. Specialty Materials sales and sales of fiber optic cable for the telecom industry likewise showed double-digit increases, and overall revenue grew 17% year over year. Gross margin, however, declined, and net income at the company dropped 19% to $0.47 per share, diluted.

The really bad news, however, waited on Corning's cash flow statement. Operating cash flow plummeted 19% year over year, even as capital spending raced ahead 263%. As a result, free cash flow all but evaporated in Q2; the company generated a paltry $52 million. Compare that to Corning's $755 million in reported "GAAP profits." Free cash flow for the past 12 months now stands at $1.9 billion, or about 20% below where it was just three months ago.

But wait! The news gets worse. Surveying the LCD TV market, Corning CFO Jim Flaws warned that things look "weaker" than he had hoped: "We have seen many LCD TV brands reduce their sales forecasts for the year." That's bad news for LCD panel makers like AU Optronics (NYSE: AUO  ) and LG Display (NYSE: LPL  ) . It doesn't bode particularly well for LCD TV retailers Best Buy (NYSE: BBY  ) and hhgregg (Nasdaq: HGG  ) , either.

As for Corning, with TV buyers pulling in their horns, global glass volumes are going to be 7% less than expected in 2011. Combined with falling prices on LCD glass, this implies weak revenue, profits, and free cash flow for Corning. Corning also isn't finding the hoped-for acceptance in "television cover glass" for its new Gorilla glass product. Mobile device makers like Apple, Samsung, and LG are having to carry more of the load here, and Corning has ratcheted back sales expectations for this high-margin product by 20%, from the hoped-for $1 billion.

Foolish takeaway
Things were looking good for a while, but for now, the bull thesis on Corning is back on hold. Check back in three months, and we'll see whether Corning can get it back on track.

Get to know Corning. Review our classic interview with CEO Wendell Weeks, in two parts.

The Motley Fool owns shares of Best Buy and Apple. Motley Fool newsletter services have recommended buying shares of hhgregg, Apple, and Best Buy. Motley Fool newsletter services have recommended creating a bull call spread position in Apple.

Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 01, 2011, at 8:51 PM, jbSFO wrote:

    Some good meticulous math work, TMFDitty! Be patient with me -- I could not follow all of it. I'll keep working on the math, but, meanwhile, could you do a hard stretch and look further into building a GLW story?

    The jump in capital expenditures (at the expense of free cash flow) tells me quite clearly that Corning is investing its cash worldwide to build capacity (read: new Beijing plant, OLED, etc) and gain market share. Doing so while the economy is down, in preparation for when it rebounds (and China, Brasil, etc. are doing quite well already) is a common well proven strategy.

    So, with GLW closing below 16 (!) today, if I hold my breath with you and don't buy until such a time when oodles of cash flow again, I get the feeling the stock may be at 25 already.

    So, what do you think of GLW management -- incompetent, visionaries, or just boring average? What's their past record, in your opinion? Do you believe any of the positive things they said in the Q211 earning call, or just the cautions about reduced TV glass projections?

    But then, you are not much for looking ahead, are you? You want the cash flow here and now, without any risk, right?

  • Report this Comment On August 10, 2011, at 10:04 PM, woodapple wrote:

    Wow, your post makes mine look feelbe. More power to you! What a joy to find such clear tihinkng. Thanks for posting! Shoot, who would have thugoht that it was that easy? More information to scan Thank you!

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