Corning Shares May Drop 25 Percent By Mid-Year

| About: Corning Inc. (GLW)

Corning (GLW) is a company with a long - 160 years - history plus a reputation for technological innovation. The company produces a necessary component for some of the hottest tech products: the screen glass for LCD televisions, LCD computer screens, smart phones and tablet computers. The challenges facing Corning are the steady price declines for technology products which must be offset by reduced expenses and steadily increasing sales volumes.

In the second half of 2011, the wheels fell off for sales and pricing of Corning's primary revenue generation product - glass for television and computer LCD screens. From the 2011 third quarter to the fourth quarter, total company revenue declined by 9 percent, gross profit margin dropped 3 percent and net income dropped by 39 percent. Profit decline in the display segment accounted for a large portion of the fourth quarter fall-off in revenue and profits.

Before discussing what could happen to the Corning results over the next few quarters and possibly a couple of years, here is a quick breakdown of the company's segments:

Display Technologies: Produces screen glass for LCD applications, primarily flat screen televisions but also computer monitors and laptop computer screens. Accounted for 40 percent of 2011 revenue.

Telecommunications Segment: Produces fiber optic cable, cable connection hardware, fiber optic network interface devices and test equipment. Produced 26 percent of revenue.

Environmental Technologies: Produces ceramic filters used in vehicle catalytic converters and diesel particulate filters new required on new diesel truck engines. Segment brought in 12.5 percent of revenue.

Specialty Materials: The best known product is Gorilla Glass used on smart phones and tablet computers. Corning just launched Gorilla Glass 2. The division also produces advanced optical products such as laser optics and ophthalmic products. Produced 13.5 percent of revenue.

Life Sciences Division: Produces optical bio-sensors used in pharmaceutical research. Accounted for 7.5 percent of 2011 revenue.

Corning also generates income from two joint ventures which are accounted for as equity in earnings of affiliated companies on the income statement. Samsung Corning Precision Glass is a joint venture with results included in the display segment. Dow Corning is a joint venture producing polysilicon products for the solar panel industry.

In the 2011 fourth quarter, all segments experienced slowing sales, but two - the Dow Corning polysilicon sales and the display technologies - are the most problematic for 2012 results and possibly future years.

Corning executives are using the term "Display market "reset" to describe what has happened to the company's largest revenue source. Corning competes with several other companies to sell display glass to the LCD panel producers and the end product manufacturers. In 2011, these companies significantly over estimated the sales volume of flat screen televisions and have excess capacity in relation to the current level of LCD panel sales. To keep panel plants running and maintaining some level of profitability, the display glass companies like Corning are being severely squeezed on pricing. For the 2012 first quarter, Corning forecasts display sales volume to be flat to down by single digit percentages. At a recent investor conference presentation, a company executive indicated it would be the 2012 second quarter before Corning could tell the display glass segment had stabilized at some predictable level of sales and profits.

Corning management may be overly optimistic that the display glass market will stabilize in 2012. PaidContent.org recently reported on research from IHS iSuppli that sales of flat screen televisions in the U.S. will decline by 5 percent to 37.1 million in 2012. Sales of 39.1 million in 2011 will be the peak year, almost completing the U.S. conversion from CRT TVs to flat screen. LCD TV sales are forecast to continue decline to 34 million per year by 2015. The U.S. is not the overall global market, but declining sales here will definitely impact total global sales. Corning is expecting total display glass sales to increase by 10 percent in 2012. That growth may not materialize.

The Wall Street estimates for the first quarter are a 3 percent decline in sales and a 46 percent drop in net income per share, compared to the 2011 first quarter. From listening to recent conference calls and reading between the lines, the prediction here is a 5 percent drop in sales and a significant miss in net income per share. Corning may be lucky to break even in the first quarter. The second quarter may also be a break even quarter as far as profits go. Over the longer term, Corning has significant growth potential from the other divisions, but currently display sales and profits control the results. The stock will probably decline significantly by the time the second quarter results are released Investors who like Corning for the long-term will be able to pick up shares for $10 or less later in the year.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.