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Corning tumbles on outlook, rattles sector

The fiber-optic giant handily tops estimates for its fourth quarter, but investors dump shares on worries about its outlook.

Fiber-optic giant Corning handily topped estimates for its fourth quarter, but investors dumped shares Thursday on worries about its outlook. Two prominent brokerage firms also downgraded Corning.

Corning's outlook, coupled with the delayed merger of JDS Uniphase and SDL, rattled the sector. Shares of Corning were down 14 percent, or $9.75, to $60.25. JDS Uniphase, which reports earnings tonight, dropped $5.18, or 8 percent, to $57.85 while merger partner SDL lost almost 9 percent to $212.25.

Salomon Smith Barney and Merrill Lynch downgraded Corning, which makes fiber-optic cable and components. Both brokerages cited concerns about future growth. Meanwhile, rival JDS Uniphase was downgraded ahead of its earnings report by Salomon Smith Barney analyst Timothy Anderson, who lowered the stock to "outperform" from "buy" on worries about sales growth in the first half.

Corning is taking a hit, but still reported strong earnings. The company reported that fourth-quarter pro forma profits rose to $314.6 million, or 34 cents a share, compared with $142.2 million, or 18 cents a share, a year ago. First Call consensus estimates had predicted earnings of 28 cents a share.

Corning officials said the telecommunications market may see "some softness" because of capital constraints, but the company essentially maintained its previous first-quarter targets, with earnings now pegged between 28 cents to 31 cents a share, compared with the previous guidance of 29 cents to 30 cents a share.

"Several customers in both our optical fiber and photonic technologies businesses have recently indicated that their order rate may be lower and more uneven than previously expected in the first half of the year," the company said.

In an interview with CNBC Thursday morning, CEO John Loose emphasized the words "may" and "some" in the company's outlook. On a conference call with analysts, CFO James Flaws repeated the mantra.

"As we hear from customers and do our own analysis we pass it on to investors," said Flaws. "When we see anything but a flat-out run, we want to pass that on."

Overall, demand is strong, officials said. Analysts, however, pulled back ratings based on short-term worries. Salomon Smith Barney dropped the stock from "buy" to "outperform."

"We recognize that management reaffirmed its 2001 guidance," said Anderson. "However, we think inventory drawdowns at Nortel and Lucent, as well as continued uncertainty in carrier spending, is likely to put a perpetual overhang on shares."

At Merrill Lynch, analyst Steven Fox trimmed his intermediate term rating on the stock from "buy" to "accumulate" and cut 2000 earnings estimates.

"Some cautionary comments about the company's two most profitable businesses, which are optical fiber...and flat panel display glass...lead us to believe that upside to EPS could be more limited during 2001 than we previously anticipated," he noted.

At Goldman Sachs, analyst Natarajan Subrahmanyan took a more positive view of the uncertainty surrounding the customer order outlook.

"While this is a slight negative, it is consistent with the overall telecom outlook and really represents only a slight tweaking of numbers. We believe investors should view this as a signal Corning is sending investors that while the demand picture has not changed in a significant way, the reallocation of fiber and photonics products to new customers is reducing visibility," the analyst said in a research note.