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.
|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
|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