Wow. That was unpleasant.
Like many investors, I spent much of Tuesday wondering: "What the heck is going on with Corning (NYSE:GLW)?" As the stock shed 5% on no apparent news, we waited until late in the day for Barron's to explain that analyst Collins Stewart was warning that Taiwanese LCD panel makers faced "severe pricing pressure," and were probably extracting price concessions from Corning in turn.
Which explains why not just Corning, but also AU Optronics (NYSE:AUO) collapsed Tuesday.
Mystery solved?
Almost. Sure, Collins Stewart explained the otherwise inexplicable sell-off. As it turned out, though, this was only the first shoe to drop. The other one fell Wednesday, when Corning cut guidance (and investors slashed its share price to ribbons). Here's the skinny:
- Corning sliced 5% off of its revenue projections for the fiscal third quarter and now expects to book about $1.6 billion in revenue.
- Because the company has relatively high fixed costs, reductions in revenue have a disproportionate effect on profits at Corning. Hence, a 5% revenue reduction will yield about a 10% reduction in earnings. Corning's now looking for about $0.44 per share (before items).
- Gross margins in particular are expected to come in more than 300 basis points lighter than previously thought. Rough guess: 47%.
Who's to blame?
Corning blames the "set assemblers" -- companies like Sharp, Sony (NYSE:SNE), Samsung, and Philips (NYSE:PHG) -- which take the LCD panels prepared by AU Optronics and LG Philips (NYSE:LPL) and incorporate them into finished TV sets. The assemblers apparently ordered too many panels in the first half of this year. Oversupplied, they're now cutting back on orders, forcing the panel makers to idle factories, and in turn depressing demand for Corning's LCD glass.
Who benefits
You. "Supply glut" is just another way of saying "buyer's market." With everybody upstream desperate to move inventory, consumers like you should see lower prices on the LCD TV sets lining the aisles at Best Buy (NYSE:BBY) and Circuit City (NYSE:CC).
Also benefiting: You, the investor. (Lucky you!) Thanks to the warning on Wednesday, you now have the chance to own Corning for the low, low price of five times earnings. Not bad for a projected 15% grower.
So who says supply gluts are bad news?
Why do Fools love Corning, whatever it reports? If you have to ask, you must not have yet read our interview with the CEO:
