Corning’s (NYSE:GLW) profits are being impacted by lower equity earnings from its 50/50 joint venture (JV) with Dow Chemical called Dow Corning. This JV manufactures silicone products worldwide for semiconductor and solar industry applications. However, beginning late 2011 and persisting to date, a severe decline in prices of polycrystalline silicon has impacted sales and profits at Dow Corning. As a result, Corning’s share of profits from Dow Corning declined from $404 million in 2011 to a mere $90 million in 2012. 
Looking ahead, an adverse outcome from the ongoing anti-dumping investigation by Chinese authorities on imported silicone products from the U.S. will add to Corning’s problems from declining polycrystalline silicon prices. In all, Corning’s share of profits from Dow Corning will likely remain suppressed in the near term. Dow Corning constitutes around 5% of Corning’s value according to our analysis.
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We currently have a stock price estimate of $14.17 for Corning, approximately 15% above its current market price.
Declining polycrystalline silicon prices impacting Corning’s profits from Dow Corning
Dow Corning’s consolidated subsidiary, Hemlock Semiconductor, manufactures high purity polycrystalline and other silicone products that are used in solar modules and semiconductor applications. Beginning second half of 2011, spot prices of polycrystalline silicon started to decline due to overcapacity in the solar industry. Prices continued to decline throughout 2012 and remain depressed till date. As a result, revenues from solar grade polycrystalline silicons have declined significantly, forcing Dow Corning to lower production levels. The cost impact from lower production is further impacting company profits. Consequently, Corning’s share of profits from Dow Corning is taking a hit.
The challenging industry situation also forced Dow Corning to halt construction of an additional manufacturing facility for polycrystalline silicons in the fourth quarter of 2012. The write-off on the carrying value of the partly constructed facility to scrap value resulted in a charge of $57 million (before tax) for Corning’s share of the write down.  Expansion of another polycrystalline manufacturing facility, which was set to begin production in 2013, and has also been delayed until the demand environment shows improvement.
Potential imposition of anti-dumping duties by China will add to Corning’s problems
Apart from the challenges brought on by declining polycrystalline silicon prices, Dow Corning faces a threat from additional duties that can be slapped by Chinese anti-dumping authorities on import of solar grade polycrystalline silicons from the U.S. In July 2012, the Chinese Ministry of Commerce (MOFCOM) launched investigations into subsidization of these products by the U.S. government on a petition filed by a group of Chinese polycrystalline silicon manufacturers. Dow Corning on its part has denied these charges.
Additional duties on imports for solar grade polycrystalline silicons from the U.S. to China will severely impact Dow Corning’s estimated cash flows as China is the largest market for solar products. These duties will raise prices of Dow Corning’s silicone products in China and thereby reduce their demand.
In the worst case scenario, where an adverse ruling by MOFCOM and continued price decline in polycrystalline silicons make this business nonviable, Corning’s share of the related asset write-offs will be around $700 million (after tax). 
Growth in Corning’s other businesses offset the impact of lower profits from Dow Corning
On the bright side, Corning’s other businesses particularly Gorilla Glass and optical fibers are continuing to register strong growth driven by the increasing adoption of touch screen consumer electronics (smartphones, tablets and laptops) and rising demand for fiber optics from emerging economies, respectively. These businesses are much larger than Corning’s stake in Dow Corning; nonetheless a further decline in Corning’s share of profits from Dow Corning can impact our current price estimate for Corning.Notes: