Three months ago, following Corning's (NYS: GLW) Q1 earnings announcement, I almost bought the stock. Despite my many years of nonstop skepticism, the company's improving free cash flow performance had me all but ready to become a Corning bull.

Well, so much for that idea. After crunching the numbers from Corning's Q2 earnings report, I'm afraid I'll have to send Corning's bull-thesis back to the corral.

Moo?
On the face of it, Corning's report wasn't so bad. Total volume at the unit that makes glass for LCD televisions rose 5% sequentially. Specialty Materials sales and sales of fiber optic cable for the telecom industry likewise showed double-digit increases, and overall revenue grew 17% year over year. Gross margin, however, declined, and net income at the company dropped 19% to $0.47 per share, diluted.

The really bad news, however, waited on Corning's cash flow statement. Operating cash flow plummeted 19% year over year, even as capital spending raced ahead 263%. As a result, free cash flow all but evaporated in Q2; the company generated a paltry $52 million. Compare that to Corning's $755 million in reported "GAAP profits." Free cash flow for the past 12 months now stands at $1.9 billion, or about 20% below where it was just three months ago.

But wait! The news gets worse. Surveying the LCD TV market, Corning CFO Jim Flaws warned that things look "weaker" than he had hoped: "We have seen many LCD TV brands reduce their sales forecasts for the year." That's bad news for LCD panel makers like AU Optronics (NYS: AUO) and LG Display (NYS: LPL) . It doesn't bode particularly well for LCD TV retailers Best Buy (NYS: BBY) and hhgregg (NAS: HGG) , either.

As for Corning, with TV buyers pulling in their horns, global glass volumes are going to be 7% less than expected in 2011. Combined with falling prices on LCD glass, this implies weak revenue, profits, and free cash flow for Corning. Corning also isn't finding the hoped-for acceptance in "television cover glass" for its new Gorilla glass product. Mobile device makers like Apple, Samsung, and LG are having to carry more of the load here, and Corning has ratcheted back sales expectations for this high-margin product by 20%, from the hoped-for $1 billion.

Foolish takeaway
Things were looking good for a while, but for now, the bull thesis on Corning is back on hold. Check back in three months, and we'll see whether Corning can get it back on track.

Get to know Corning. Review our classic interview with CEO Wendell Weeks, in two parts.

At the time this article was published The Motley Fool owns shares of Best Buy and Apple. Motley Fool newsletter services have recommended buying shares of hhgregg, Apple, and Best Buy. Motley Fool newsletter services have recommended creating a bull call spread position in Apple.Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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