SIVY ON STOCKS from CNNmoney.com
October 19, 2001

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Shattered glass

Reflections from the Corning debacle.

By Michael Sivy

NEW YORK (CNNmoney) - I receive e-mails from time to time taking me to task
because stocks that I like have gone down. Not surprisingly, these e-mails
have become more frequent in the past six months as the bear market has
worsened. But not all stock market disappointments can be fully explained
by the recession. Some stock disasters are genuinely shocking and seem to
violate all the principles that usually keep investors out of serious
trouble. Such cases are worth special consideration and analysis.

There is no stock that has surprised me more over the past year than
Corning, the world's leading maker of fiber optic cable. Had you told me a
year ago that Corning (GLW: down $0.12 to $7.90, Research, Estimates)  was
going to drop from more than $100 a share to less than $8 today, I would
have said that was practically impossible. And yet it happened.

The fundamental case for Corning seems unassailable. The former maker of
high-performance glass discovered that the company's expertise could be
much more profitably employed in high-tech than in making ovenproof
cookware. The burgeoning telecom market had a seemingly endless appetite
for fiber optic cable. And Corning quickly became the world's biggest
producer with 40 percent of the market. Moreover, the company not only was
the big-volume producer but was also the leader in the most-profitable
cutting-edge fiber optics.


Then came the problems

Only trouble was that telecom companies became so overconfident in the late
1990s that they laid far more cable than they actually needed. In fact,
there will be excess capacity for at least another 12 months. Needless to
say, few customers are going to order a lot of cable from Corning in the
interim. So sales volume in some product lines is down more than 50 percent.

In its third-quarter report, released after the market closed on Thursday,
Corning announced a 74 percent drop in operating earnings to 9 cents a
share. And that was the good news. Aftertax restructuring costs for the
quarter were $222 million. More restructuring charges are still to come.
The fourth quarter will likely result in an operating loss of at least 20
cents a share. And Corning's chief fiber optic cable plants will be idled
for at least two months.

At this point, there are three questions that need to be answered. Where
does Corning go from here? Is there any point at which it would be a
contrarian buy? And finally, is there anything to be learned from the
situation?

If I owned individual tech stocks rather than indexes, I would have owned
Corning, I would have held it throughout the decline -- and I certainly
wouldn't sell it here. The company remains the dominant player in fiber
optic cable. And for all the cable that has been laid, there is still 10
times as much left to do. Moreover, when the wiring starts again, Corning
will profit from being the technological leader with the best high-margin
products.

On the negative side, Corning is spending somewhere in the neighborhood of
$1 billion on restructuring. Less than half of that is in cash and Corning
has more than $1.5 billion on hand, so serious financial problems are
unlikely. But they are possible if business deteriorates far more than
anyone expects. At this point, I would treat Corning stock like an option.
The upside is enormous -- three or four times the current price in a couple
of years. But the risk is much greater than usual for a stock of Corning's
quality.

The most basic truth to be learned from the Corning story is that your
reasoning can be impeccable and you can still lose your shirt on a stock.
Corning seemed to have everything going for it -- leadership and
technological dominance in a market with a very high core growth rate and
an exemplary balance sheet. Corning is the poster child for
diversification. The goal is not so much guarding against obvious risks,
but rather guarding against risks that can't happen -- but do.

Two final thoughts. Corning traded as high as 91 P/E last year, and market
historians will tell you that as a rule no company sustains a P/E of more
than 50 for any length of time. There's just not enough good news in the
world for that. Finally, one-product companies -- no matter how brilliant
that product may be -- always carry special risks. In the short run at
least, the market for Corning's fiber has turned out to be an optical
illusion.

###

Read all of Michael's columns at:
http://money.cnn.com/markets/sivy/

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