MAJOR EUROPEAN FIBER DEAL ANNOUNCED
Salomon Smith Barney
Monday, May 10, 1999
--SUMMARY:--Corning, Inc.--Connectors & Other Components
*Corning announced that COLT intends to use LEAF in its Pan-European
network. We expect about 500,000 kilometers of LEAF to be shipped for
this network by the middle of 2000.
*That equates to about 1/4-1/3 of the original Level 3 project. Now,
based on Level 3's intention to use 120 fibers in its intercity network,
which is above our expectations, Level 3 should be bigger than originally
anticipated. Level 3 should start to deploy fiber in May.
*We believe that most of these projects are reflected in our current
estimates.
*Other European wins should represent upside.
*The COLT network will use Corning optical amplifier modules, as well.
*Reiterating Buy and $77 price target.
CORNING ANNOUNCES MAJOR EUROPEAN FIBER PROJECT USING LEAF
Late last week, Corning announced that COLT Telecom Group, a U.K.-based
CLEC, plans to use LEAF in its pan-European fiber network. We anticipate
that roughly 500,000 kilometers of LEAF will be deployed over late 1999
through the end of 2000. We expect Corning to announce other European
projects, as well. The COLT project should begin in late 1999 and run
through the middle of 2000.
To offer some relative idea of the size of this project, it is roughly
one quarter to one third of the original Level 3 announcement, which
Corning indicated would be about 1,000,000 miles at the time, expected to
ship over two years. Our recent discussion with Level 3 indicates that
the amount of fiber required for its network should now be closer to 2
million miles for the intercity routes.
OPTICAL AMPLIFIERS, TOO
COLT plans to deploy Nortel's 32-channel WDM system, which uses Corning
optical amplifier modules. Between new builds and upgrades of existing
systems, we believe that Corning's photonics business should post close
to 50% top-line growth this year.
MAINTAINING ESTIMATES FOR NOW--OUR 2000 ESTIMATE IS LIKELY LOW
Our $1.78 estimate for 1999 is built on a doubling of LEAF volumes, and
we believe that the COLT and Level 3 alone are as much high-end fiber as
Corning shipped last year. Corning has a couple of other dozen customers
for LEAF.
Any upside to our estimate for this year and next should come from LEAF
projects as yet unannounced. Give timing, we suspect that some of the
upside will slip from 1999 into the year 2000, when the costs of the
Concord plant, which have already begun ramping and should accelerate in
the second half of 1999, will have anniversaried. On top of LEAF, we
believe that new products in photonics are likely to have an impact in
2000. Furthermore, we expect that fiber pricing will gradually
stabilize. Corning's estimate of a 15% year-over-year decline in 1999 may
be realistic, given that our analyst in Japan reports that he believes
that NTT may slow down its purchases again, and there is still
significant fiber overcapacity in Japan. However, the gradual
improvement in the world economy should result in projects going forward
that have been delayed, increasing demand for fiber and helping to absorb
international overcapacity. Because LEAF should continue strong into
2000 with incremental volumes and the single-mode cycle should be firmly
in an upturn, we suspect that our $2.05 estimate for that year will be
smartly exceeded. Our estimate does not include any contribution from
Dow Corning. |
