Double Trouble Could Lead to Corning's Collapse
By Cody Willard
Special to TheStreet.com
05/10/2002 02:21 PM EDT
Editor's Note: This column was released as a special edition of The Telecom Connection newsletter at 11 a.m. Friday. This is being published as an extra for RealMoney subscribers. The Telecom Connection is generally a broader, more in-depth analysis of the sector and its stocks, but occasionally, a news-based, shorter special like this one is sent to subscribers. Click here for details on how to sign up for your newsletter subscription.
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Corning's (GLW:NYSE - news - commentary - research - analysis) numerous problems go well beyond the collapse of the teleconomy. The company is essentially betting everything on a return of demand for its fiber-optic cable and equipment. Perhaps more troubling, its capital structure is also in shambles, meaning that at least an organizational restructuring -- and maybe a recapitalization -- almost assuredly lie ahead.
So what's an investor to do now? With the stock trading near its 52-week low of $6, some might argue that Corning looks like a value at current levels. Instead, however, I'd consider going short.
Fiber Fiasco
Look, the fiber market won't likely return to its heady levels of yesteryear, when backlogs at Corning were booming, and entire business models were put on hold for fear that no fiber would be available to lay. Even in a best-case scenario, the metro and access fiber markets that Corning needs as its next big drivers won't match the total demand that we saw in long haul in the late 1990s. (The metro market is made up of the wires and equipment that transport traffic back and forth from local hubs, and the long-haul segment transports traffic out of the local region.) The number of strands of fiber-optic cabling in a metro build is usually just one-fourth the number used in a long-haul build.
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But now, fewer customers exist for that fiber, and that compounds Corning's problem. In fact, only the cable companies, such as AOL Time Warner (AOL:NYSE - news - commentary - research - analysis) and Comcast (CMCSK:Nasdaq - news - commentary - research - analysis), and the incumbent local exchange carriers, or ILECs, such as Verizon (VZ:NYSE - news - commentary - research - analysis) and BellSouth (BLS:NYSE - news - commentary - research - analysis), have any capital to spend on such fiber builds.
Plus, fiber pricing declined between 10% to 15% last quarter, which could translate into an annual decline of around 35% to 45%. This means that even if the fiber market does turn around and volume grows even slightly year over year, total revenue would still be down. Fiber demand would have to skyrocket for revenue to even remain flat.
Some pundits point to Corning's other businesses as a way to offset its fiber fiasco. But its information-display and advanced-material businesses run at less than 10% operating margins on slightly more than $1.5 billion in annual sales. Even that low return is skewed, because most of it comes from a joint venture the company has with Samsung.
Financial Issues
The company needs more than $1 billion a year just to cover the fixed operating costs of its many facilities. If the market for fiber-optic cabling doesn't rebound sometime soon, Corning will need to decommission additional plants to avoid burning through all of its cash.
That puts the company in a tight spot: If Corning decommissions enough plants to stem its massive ongoing losses, it will have to remove those plants from its books. As a result, it won't be able to access its credit facility, which requires the company to maintain a debt-to-book ratio of no more than 60%. That ratio is already near 50%, double what it was a year ago.
Some analysts claim the stock looks attractive from a book-value standpoint. I guess they're failing to recognize that around 40% of that book value comes from intangible assets, which, frankly, are irrelevant to book value. And then there's the negative $3 per share of net cash. It doesn't seem like a bargain to me.
Despite claims that Corning could represent a good value at these levels, the company is very unlikely to generate the earnings needed to support its massive infrastructure. The bottom line is that it will either end up in default of its credit facility or be forced to raise some cash. Neither scenario does existing shareholders any favors. |
