I Agree with your comments about the Barron's article. I worked for Corning until late last year, and will add my own two cents here.
"On Wednesday, Quanta Services, one of the leading ditch diggers for fiber, said its telecom business had fallen by a third since December."
This relates only to new fiber, and in the U.S. There are other areas of the world that lack fiber in the ground. China will be installing a large base of fiber optic in the near future, a market that Corning dominates. Also, as demand for bandwidth grows, unlit fiber will require photonics to light it. I would also add that there's quite a bit of fiber in the ground that will never be lit because it is already obsolescent for current photonics technologies. There seems to be a misconception on the street that fiber is fiber. There are significant differences that preclude using older generations of fiber optic for 10 Gig and/or 40 Gig, DWDM, etc.
"Corning's prospects matter more, of course, than its miserable recent past. Some investors take solace in the nearly half of revenues that don't come from telecom businesses; among other things, Corning makes glass for flat-panel displays. But the non-fiber businesses don't have an exciting upside. Their operating margins run in the single digits. Corning's hope remains in a telecom recovery."
Corning generally has very high margins for its products, and often is quick to dump businesses that don't offer high enough margins or good growth prospects. The only notable exception on margins is the flat glass business, where gross margins are low but the growth rate is very high. There are several non-telecom related products with exciting upside potential. One could start with catalytic converters for diesel engines. New regulations will drive a whole new market for diesel catalytic converters, which are significantly different than automotive catalytic converters. Corning has good technology for diesel catalytic converters, and stands to gain a dominant position in that market sector. Don't forget also that Corning has a history of continuously improving automotive catalytic converter substrates.
"Pricing for fiber remains terribly weak. Even on a 10% rise in fiber miles, the dollar value of Corning's fiber sales dropped 16% in the last quarter. Other optical-component makers, such as Furukawa Electric and JDS Uniphase also announced lousy quarters. In reporting its last quarter's results, Cisco Systems told investors that its optical unit was doing the worst."
True. Corning's gross margins for fiber optics are down because the product mix has changed from newer high margin fiber to older technology fiber sold to Russia or China. As bandwidth demand uses up excess capacity in the U.S. and Europe, watch for the product mix to shift back to newer technology fibers where Corning has a technology edge and commands higher margins. |
