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

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


Tough Bet

So far, we've learned that Corning has a very weak balance sheet -- roughly $3.8 billion in long-term debt vs. a total revenue stream of only $3 billion. And we've learned that even against a once-in-a-lifetime macro backdrop, Corning couldn't generate any cash for shareholders. If it didn't generate cash from operations, where did cash come from?


Cash Sinkholes

The friendly public markets provide the cash for Corning. Because the company can't generate cash from operations, it sells stock and issues debt.

One more table: Let's see what happened to the cash that investors provided. That will determine just how skilled the capital allocators are at Corning:


Shrinking Equity
Shareholders give it book value


On the basis of my review, I'd say Corning's $7 billion valuation is outrageous. It suggests that investors are hoping for a second gold rush, another Internet buildout. Considering the state of Corning's balance sheet and its participation in commoditized, weak end-markets, I'd put a value of $2 per share on Corning stock, at most. Corning closed Tuesday at $6.15.


For more tips on finding the good and bad in a company balance sheet, please be sure to mark your calendar for May 28. I'll be talking turnarounds and turndowns in a live chat with readers. Please click here to sign up.

Arne Alsin is the founder and principal of Alsin Capital Management, an Oregon-based investment advisor and portfolio manager of The Turnaround Fund, a no-load mutual fund. At time of publication, neither Alsin nor ACM held a position in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Alsin appreciates your feedback and invites you to send it to arne@alsincapital.com. Click here to receive Arne's latest favorite stock picks from his newsletter, The Turnaround Report.

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