Corning Price Cuts Scrutinized

A research note issued today says Corning Inc. (NYSE: GLW) is fighting for traction by cutting fiber prices drastically and selling millions of kilometers of half-price fiber to cable installers in China.

Analysts David A. Jackson and Jason Yablon of Morgan Stanley Dean Witter & Co. say China's hunger for low-priced fiber and Corning's need to compensate for weak demand in North America and Europe have met to the benefit of both sides. They speak plainly in today's note:

"We think Corning, as part of an agreement with the Chinese Ministry of Telecommunications, has cut fiber prices by 50% in China in exchange for significant SMF [single mode fiber] orders... We now believe that Corning significantly increased its presence in China as a result of an agreement [with the ministry] to significantly reduce fiber prices in return for assurances of large deployments of standard single mode fiber. We believe the Ministry is using Corning strategically to drive fiber prices down in China."

A spokesperson for Corning, which expects to announce earnings July 26, says the note contradicts what CEO John Loose said in a pre-earnings conference call July 9: "He stated we were seeing no increase in fiber pricing pressure."

Morgan Stanley estimates that Corning will sell roughly 6 million kilometers of fiber, including about 2 million km of premium fiber and 4 million km of so-called "legacy" fiber, in China this year. The campaign is part of Corning's efforts, the analysts say, to keep demand in line with supply.

Corning isn't alone in its juggling efforts. In North America and Europe, carriers have gone out of business or overestimated the market, with the result that capacity has exceeded demand and most fiber and component suppliers are left holding gear they can't sell. The result has been layoffs and plant closings for Corning and others (see Optical Hearts of Darkness).

The situation is worsening, experts say. "We haven't hit bottom yet with this," says Chris Bulkey, research analyst with Optical Oracle, Light Reading's research service. "Inventory levels are worse than they were last quarter."

Meantime, China's unique situation is that the country's been struggling to get as much fiber as possible to build out its infrastructure. And that's presented a clear opportunity for many companies, including Corning (see Corning CEO Likes Lasers, China ).

Corning's efforts to spur demand by reducing pricing could bring up its numbers a bit in the short term, but the tactic won't help the market much overall, say analysts.

Jackson and Yablon, for instance, have increased their 2001 revenue estimates for Corning to $1,771 million from $1,767 million, and the Morgan Stanley's EPS estimates for the year are now 19 cents instead of 17 cents. But the analysts are clear that the stock price could drop: "[Our] 20-year discounted cash flow analysis suggests fair value for the stock at $12. Our historical trough valuation suggests downside to $7 per share."

Others say Corning's activities could pressure competitors. "It doesn't bode well for Lucent, which has been under pressure to sell its fiber business anyway," says Syed Haider, VP at Frost Securities Inc. In the long term, he says, pricing pressure usually translates to further weakness in stock value.

As this story went to press, Corning shares were trading at $14, down 0.01 (0.07%).

- Mary Jander, Senior Editor, Light Reading
http://www.lightreading.com

Editor's Note: Light Reading is not affiliated with Oracle Corporation.