Corning's Concern Shakes JDS as Earnings Draw Near

Optical component makers Corning (GLW Quote - Cramer on GLW - Stock Picks), SDL (SDLI Quote - Cramer on SDLI - Stock Picks) and JDS Uniphase (JDSU Quote - Cramer on JDSU - Stock Picks) dropped sharply Thursday amid worries that customer demand for networking equipment is slackening.

The networking sector has been dealing for months with the prospect of an industrywide slowdown in equipment spending, as service providers large and small run low on cash and shrink their budgets. But worries about demand spiked Thursday after Corning cautioned investors on a conference call that first-quarter results could weaken slightly from previous estimates as a result of piles of inventory sitting at two big customers, Nortel (NT Quote - Cramer on NT - Stock Picks) and Lucent (LU Quote - Cramer on LU - Stock Picks). Corning, SDL and JDS make parts for the gear that Lucent and Nortel sell to telecom network builders.

Wednesday evening, Corning posted fourth-quarter earnings that beat Wall Street estimates. But in widening its first-quarter earnings forecast by a penny per share on either side, to 28 to 31 cents a share from 29 to 30, Corning sent a rare signal that the sky isn't entirely blue in its corner of the networking world. Parroting the industry line, Corning said the problem isn't so much the inventory overhang as industrywide uncertainty about spending forecasts.

Merrill Lynch promptly obliged Corning with a subsequent downgrade, pushing the stock down $9.25, or 13%, to $60.87. JDS investors, taking Corning's warning as a preview of its Thursday evening earnings release, pushed JDS down $5.44, or 8.5%, to $57.62. SDL, which has agreed to be acquired by JDS in a deal whose imminent close was delayed Wednesday by continued antitrust scrutiny, dropped $24, or 10%, to $208.12.

Lights Out

The selloff ensued at least in part because Corning forecast weakness in its photonics division, the unit that makes the coveted lasers and amplifiers used to stoke lightwaves through optical fiber. The company said first-quarter photonics revenue growth would range from 75% to 90%, some 10 to 25 points short of earlier projections. Corning concluded that slowing photonic growth would likely be offset by a strong performance from its fiber cable business, where demand continues to outpace supply.

Corning component rival SDL handily beat expectations for fourth-quarter profits and sales Wednesday, managing to sidestep the ongoing woes of big buyer Lucent. But SDL left its growth projections unchanged, which some observers took as evidence the company is hedging against inventory surpluses and spending cuts in the sector. In previous quarters, SDL's outlook has been consistently upbeat.

Likewise, Corning left its profit guidance untouched for 2001, reiterating its forecast that earnings will come in at $1.40 to $1.43 per share, in line with the Wall Street estimate.

Investors and analysts now expect JDS to follow suit and either maintain existing guidance or, citing uncertainty, to cautiously lower growth forecasts for 2001.

As effects from a cooling economy, stockpiled inventories and constrained network-building budgets loom, companies across the industry have increasingly placed their faith in a strong second half of the year to pull them through. But many observers remain skeptical that these clouds will vanish quickly and that the capital markets will return to their heady ways.