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Watch for the Third Rail at Corning

This article first appeared May 14 on RealMoney. To read Arne's commentary regularly, please click here for a free trial.

The game is up. The buildout is over. Shareholders of Corning (GLW) are in for a rude awakening. This $7 billion market-cap company could very well lose much of its equity value in the near future.

As a leading provider of optical fiber and cable, Corning is analogous to the rail manufacturers of the mid-1800s. With the advent of the railroad, the stock market was in a speculative frenzy back then, just as it was during the Internet craze of the 1990s. Of course, the market had justification: The railroad revolutionized business.

As those rail manufacturers soon learned, though, once the rail lines were built, the manufacturers became irrelevant. The owner of the railroad, the product distributors and consumers reaped the benefits of the railroad, not the rail manufacturer.

With the current glut of telecom routes and excess capacity in the fiber industry, the market for fiber-optic components has been in a free fall. Corning's competition is fierce -- as I'm sure it was, postboom, for rail manufacturers in the 1800s -- from the likes of Furukawa OFS, Fujikura, Alcatel (ALA), Pirelli, Draka, Sumitomo and others.

When I break down a company, I like to start with the basics. First, the market values Corning's business at $7 billion. What do investors get for $7 billion? Let's look at a simplified picture of the revenue stream:

Stream Running Dry
Revenue per share keeps slipping

For $7 billion, then, investors get a company with a paltry revenue stream (now running at about $3 billion per year), a company that's in a sector plagued by overcapacity and commodity pricing, and a company with an exceptionally weak balance sheet:

The Balance-Sheet Story
Here are three of the latest chapters

Please click here for PDF version.

After reviewing a company's balance sheet, I like to take a careful look at cash flow:

Tough Bet

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