Behind Corning's Big Drop
As a key supplier to the flat-panel TV industry, Corning has taken its share of hits in recent days as some of the biggest makers of those products warned of disappointing results.
The latest dour dispatch came from LG.Philips LCD (LPL), a joint venture of South Korea's LG Electronics and Dutch electronics maker Philips (PHG). LG.Philips warned that shipments in the current quarter will grow at only half the pace previously expected, and that the average selling price is declining (see BusinessWeek.com, 06/14/06, "Taiwan Dogs Korea for LCD Share").
Shares in Corning (GLW), which supplies glass to LG.Philips and its many rivals in the LCD TV business, have dropped 28% since Apr. 21. Much of the descent was fueled by concerns facing the TV makers.
A TELECOM TRADITION.
The LCD TV business was what pulled Corning back from the brink. The company placed a big bet in the 1990s on the fiber optics telecommunications networks then being built around the globe. Corning's fiber optics business generated nearly $3 billion in sales in 2000 alone. Then, the telecom bust took place and demand fizzled amid a glut of network capacity. By fiscal 2005, the LCD business accounted for more than $1.7 billion, or more than 36%, of Corning's sales.
Analysts caution against comparisons with the telecom bust. The drop-off in LCD-TV appears to have less to do with dwindling demand than with short-lived oversupply, says analyst Paul Semenza at iSuppli, the Silicon Valley market research firm. Compare this with the telecom business of another era, where expectations were vastly overstated and demand never materialized. "In this case, the demand is real and the growth expectations are real," he says.
Corning's share drop can instead be traced to the simple cycles that often plague the consumer electronics industry: a huge inventory built up in the wake of a big increase in manufacturing capacity. "The panel makers have been over-building their factories," Semenza says, "and that has led to a huge excess supply of product building up in the market, which has led to prices falling."
Part of the reason for the oversupply was the World Cup soccer tournament—but this hasn't sparked the near-term surge in LCD TV demand that many had expected. "They must have been smoking something when they thought about the World Cup," Semenza says. While there was some gain in demand in the first and second quarters, it didn't meet the expectations of some suppliers.
And despite the reactions of Corning investors, other analysts are hanging tough. Tim Daubenspeck at Pacific Crest Securities in Portland, OR still rates Corning an outperform and maintains a share price target of $33. He agrees with Semenza that high expectations of World Cup related sales spurred an oversupply. "There's too many guys making too many panels with too-high expectations."
Demand for LCD TVs will continue to gather steam, analysts say. Eventually LCD TV sets will outstrip conventional cathode ray tube TVs by 2010. By that year, they will account for 56% of the worldwide market, iSuppli says. The researcher is sticking with its recently increased forecast for 2006 shipments to hit 46.7 million units, a 75% increase over 2005.
Corning didn't return calls seeking comment on its recent drops, but on May 22, the company had said it was holding to expectations for per-share earnings of 24 cents to 26 cents on sales of about $1.3 billion for the current quarter. And inventory levels? They'll peak in the current quarter, the company said at the time.