Don't Hold Your Breath - or Corning Stock - Waiting for LCD Panels to Recover (GLW, LPL)

Includes: GLW, LPL
by: William Trent, CFA

We have written numerous times about the LCD panel glut and its impact on Corning (NYSE:GLW). Here’s more from DigiTimes:

LG Philips LCD (NYSE:LPL) expects its large-size panel area shipments to increase by a mid-teen percentage sequentially in the second quarter of 2006, a decline from the previous guidance of a mid-to-high twenties percentage increase.

LCD TV shipment growth at the end of the second quarter is expected to be approximately 25% sequentially, approximately 50% less than previously announced expectations, the company said.

The large-size panel ASP (average selling price) at the end of the second quarter is to decline by a mid-teen percentage quarter-end on quarter-end, compared to a mid-to-high single digit decrease guided previously.

The company’s EBITDA margin is now expected to be around 10%, a decrease from the previous guidance of approximately 20%.

Slower growth and EBITDA margins cut in half - a little back-of-the-envelope math says that will mean their EBITDA is less than half of what they expected it to be. But didn’t an analyst recently say (as reported in Barrons):

All sales are good. Although updated unit sales forecasts are lower than originally expected, they are still healthy and will go along way to relieve the annual seasonal inventory build-up that spilled into Q2?

(The analyst) believes the news is entirely consistent with Corning’s view of the inventory build-up peaking this quarter, to be followed by two whirlwind LCD quarters to close out the year.

Back to the DigiTimes article:

Several factors affected the global LCD industry during the second quarter. First, the industry experienced sharper-than-expected price declines across all product categories. In addition, while mid-to-long term demand for panels remains strong, LG.Philips LCD saw weaker seasonal demand during the second quarter, which has increased its inventory to about four weeks, a higher level than anticipated, commented Ron Wirahadiraksa, president and CFP of LG Philips LCD.

Given these factors, the panel maker has decided to temporize production to address inventory concerns and better balance its short-term supply with demand. Furthermore, the maker is reviewing its total capacity plans for the year and beyond.

Reducing capacity for the year and beyond? But this was all going to be over by the second half!

Can you hold your breath until the second half? Rather than cling to hopeful projections, you may want to consider whether you should hold your shares that long as well.

So what about this article also from today's DigiTimes?

Min-tai Hung, CEO of Proton, said it has landed orders from the US, with the amount reaching over 50,000 units, at Computex Taipei 2006 (June 6-10); Chi-Ming Liu (transliterated from Chinese), assistant manager of Kolin’s trading unit, said Kolin will start shipping 40-inch-and-under LCD TVs to Brazil in the third quarter; executives at Top Powersonic said shipments of its LCD TVs to the US will reach a record of 20,000 units; Tatung said it has received strong orders from Europe and the US; while Eugene Huang, a senior executive of the IT and Optronics product unit for the Teco Group, said buyers from Europe and Middle East were keen about its products at Computex Taipei, according to the Chinese-language Economic Daily News. No schedules were provided for the orders, just total amounts.

Did you catch that last sentence, the 'throwaway'? The companies got strong orders, but no schedules were given. No prices either.

These could just be advance orders for next year, for all anyone knows. Companies like to come away from trade events with something to talk about, so there is no guarantee that these were made on favorable or even rational terms.

GLW-LPL 1-yr comparison chart:

GLW-LPL 1-yr comparison

Disclosure: The author’s previous bearish position (long put options) in GLW has been covered.