About Those "Record" Black Friday Sales...
Yup. The rumors were all true: record sales... on negative margins. Because it is not difficult to dump product when you are, well, dumping. Case in point is Corning which today preannounced a lowered Q4 outlook. And if anyone should know about the state of the market for the most desired item (after the Apple trinkets of course) namely LCD TVs, it's Corning.
Another Negative Pre-announcement — On Tuesday Corning lowered its Q4 outlook. Despite healthy LCD TV sales, a customer in Korea has reneged on contracted deliveries into year end, resulting in SCP volume growth of +5%-+10% vs. +20% prior; this action is unprecedented according to Corning. In response, Corning is idling ~25% of total capacity (we believe primarily in SCP, where it will take charge). Add'ly, Gorilla now expected to decline -25% q/q vs. prior -15% guide due to softer tablets (we believe weak Android and RIMM tablet sales).
Feeling Blue about Black Friday TV Sales — Investors seemingly cheered aggressive LCD TV promotions and anecdotal reports of healthy sell-through. We agree that price promotions were certainly aggressive, but we are left feeling "blue" about Black Friday – What does it say for the state of LCD TV demand if the only way to stimulate unit growth is with massive price cuts? If the supply chain was unprofitable before recent aggressive retail pricing, how much worse will it be going forward as consumers' expectations are now likely anchored at the lower price points?
Glass Pricing May Have to Come Down, and Sharply — LCD TVs have shown remarkable price elasticity, implying that the only way the industry can grow units is by lowering prices. In our view, this boils down to one key question for Corning: How long can glass pricing hold firm (or at least inline w/mgt's plan) with glass accounting for ~20% of the cost of an LCD TV panel, while the entire downstream LCD industry is unprofitable and glass makers capture essentially all the entire profit pool?
Bottom line, the LCD foodchain is unhealthy and we don't believe GLW's glass margins are sustainable over the long-run. The decline in margin will likely come in the form of a series of ASP declines, some of which will likely be inline with mgt's long-stated 2-3% q/q declines, but some of which will likely be step-function declines in the high single digits.
Ok, we get the problem with price points: the only reason anything sold is because retailers ate it in the form of negative margins: surely the upcoming pounding of the discretionary retail sector will be enough punsihment for that.
But not enough glass? Can't someone just blow a nuke in the desert? Suddenly there will be an epic glut of glass.
Now...if onlt someone could put two and two together and combine a desert and a nuke. Hmmm: this is a problem with added difficulty and will require at least a Nobel peace prize winner for its prompt solution.