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All good things must come to an end, and for Corning (NYSE: GLW ) , the end came this week.
On Tuesday, the world's biggest maker of ultra-thin glass -- used by customers such as LG Display (NYSE: LPL ) and Samsung to manufacture LCD television panels -- reported a fiscal fourth quarter that contrasted starkly with gains recorded in earlier quarters. After posting profit growth through the first three quarters of the year, sales for the final quarter of 2008 dropped 31% year over year. Profits plummeted 67%.
And yet, investors bid the shares up yesterday. Why?
This recession will end
First, Corning is proceeding with its promised consolidation moves, laying off 3,500 workers and restructuring operations "to get our cost structure in line with the sales level."
Second, Corning waxed optimistic about the future, reminding us that: "This recession will end." Despite "a slow start to 2009 with first-quarter combined display volume down 20% to 25% [with] sales, gross margin and net income ... sequentially lower,” Corning states that “recent news about the display supply chain and end market is encouraging."
LCD TV sales at retailers such as Best Buy (NYSE: BBY ) , Wal-Mart (NYSE: WMT ) , and Sears Holdings (Nasdaq: SHLD ) were apparently "stronger in December than we anticipated and this trend is continuing into early January." As a result, Corning predicts "a significant increase in glass demand in the second quarter."
With a recovery so near at hand (according to Corning), and the company poised to reduce annual expenses by $150 million to $200 million, investors seem eager to board this train before it leaves the station.
Don't pack your bags just yet
Me, I'm not so sure, and here's why: Last month, when Corning first announced plans for "permanent manufacturing capacity consolidation" that included a reduction in capital spending to $1.1 billion, I applauded the prospects for "as much as $1.4 billion in free cash flow [in 2009] -- and a price-to-free cash flow ratio of 10."
Turns out, that was a tad optimistic. Far from ramping up free cash flow this year, Corning CFO Jim Flaws confided that he expects "first-half free cash flow to be negative." And even if his predicted turnaround arrives in Q2, the most Corning will commit to is the "goal of being free cash flow positive for the year."
Suffice it to say that I had hoped for better news than this, folks. Corning’s dominance in the LCD market should by all rights generate a tidal wave of cash for its shareholders. Continued eking out of mere "free cash flow positive"-ity -- although historically par for the course at Corning -- simply won't cut it. Not for me.
Did Corning's recent performance contain clues that could have helped us predict this week's disappointment (hint: Yes)?
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