Friday, December 17, 2010

UBS and JP Morgan Give Veeco Some Love (and why the sell-off was overdone) VECO; AIXG; CREE

In early pre-market action VECO is up $1.08 at $41.16, that is not convincing strength compared with the 19.8% drop from Monday's close through yesterday's. These stocks are not for the timid, see our headlines after the jump.
We noted the first-day hammering that followed Citi's downgrade in "As Veeco Tumbles 15%: "VCs May Be Too Late To LED Lighting; Big Money Needed, Exec Says" (AIXG; CREE; VECO)", here are some opposing opinions.
From Notable Calls:
Veeco Intruments (NASDAQ:VECO) is being defended at two major firms this morning:

- UBS (Steven Chin) saying they believe Veeco’s stock has traded lower on concerns that China’s LED subsidy program may end early according to a story in the China Business News. Firm notes Jiangmen City and Yangzhou City (2 biggest programs in China) have always made it clear their 2-year LED subsidy programs which began in 3Q09 would have 3Q11 end dates. They did not change their Veeco EPS estimates just because Yangzhou City may end its program 1 month early per the China Business News.

Expect continued speculation over a new Chinese LED subsidy near term
Our discussions with 4 of the major customers in Yangzhou City found none are rushing to place orders by a 7/1/11 deadline or installing. However, customers believe details on China’s 5-year plan in 1H11 could see the LED subsidy change from equipment to applications which UBS still believes is a long term positive for Veeco. While Veeco’s q/q order growth was due to China orders in 2H10, they believe Korean orders resuming in 1H11 is a key reason to keep a Buy rating.

Korean customer equipment orders from Veeco likely resume in 1H11
Their checks found LG Innotek (Veeco’s #1 Korean customer) will spend KRW 194B (about $170M) in capex in 1H11 which we estimate is at least 30 MOCVD reactors ($75M in sales for Veeco). Firm views this as a positive inflection point as Veeco’s Korean customer orders were $0 in 3Q10 and 4Q10. They also expect Korean orders for Veeco’s new MOCVD tool could also be a catalyst in 1H11.

Valuation: Maintain Buy rating and 12-month price target of $54
UBS PT is based on 10x their cross-cycle EPS estimate of $4 plus $14/sh in net cash

- J.P Morgan is out with a note titled ' Risk/Reward Just Got A Lot More Attractive; Buy on Recent Weakness'

They rate VECO Overweight with a $75 per share price target....MORE
At Eric Rosenbaum raised some of the same points on Wednesday but it didn't matter, the stock fell a further 6.3%. To be fair, Eric is one of the sharpest journalists writing about the clean/green/alt space and it's not his job to time entry and exit points whereas I had the luxury of seeing his piece and sitting on it for a couple days. Here's his take:

The Veeco Selloff: 7 Reasons It's Overdone
The downgrades of Veeco(VECO) and Aixtron(AIXG) on Tuesday put the brakes on the recent rally in LED stocks, but it was the Veeco downgrade to a hold by Citigroup that really exacted the biggest toll on shares. 

Veeco shares were down 16% on Tuesday, whereas Aixtron shares were down 4%.
For two stocks that are in the same exact business and typically trade as a basket trade on the outlook in the LED sector, it's a little confusing to see such a disparity in the trading on Tuesday. Sure, it was negative sentiment for both Veeco and Aixtron, but the 12% additional decline in Veeco shares didn't seem warranted. Veeco had the biggest loss on the market in Tuesday trading. So was the Veeco selling overdone?

All the LED stocks were down and trading volume was elevated for the entire sector.
All it takes -- especially after a rally, which has been going on for over a month -- is for a major Street firm to step up and renew everyone's worst fear of something going wrong for the volatile LED sector, and the LED stocks will be under the gun once more. LED stocks have been on a run since a late summer/early fall selloff, led by Cree(CREE). Over the past three months, the rise of LED stocks far surpasses the gains in the Nasdaq and S&P 500, up 16% and 11% respectively.

Citigroup is stoking renewed debate about China slowing its subsidy support for the purchase of the MOCVD equipment sold by Veeco and Aixtron. Yet the debate about China's role in supporting to continued growth of the LED market through subsidies has been raging throughout the past year.

Indeed, at the open on Wednesday Veeco shares were back up by 4% and the LED stock hit its average daily volume within an hour of the open. It's hard to imagine a stock not getting a little trading pop a day after a 16% decline, though. Aixtron shares slipped slightly at the open.

In light of all this, here are 7 factors to consider in making call on whether the Veeco selloff went a little too far....
No. 1 Reason the Veeco Selloff Might be Overdone:
Investors in the volatile LED space didn't really learn anything new on Tuesday from the Citigroup report, as far as potential reasons for a pullback in the LED sector. It was more anecdotal evidence of a potential hard stop on LED subsidies, but this type of anecdotal report has been out there in the market for months. Citigroup said itself that there is "no smoking gun" and that there is "no official confirmation" from the Chinese government that anything is going to be done.

Citi argues that "concern is mounting" and provides some anecdotal evidence for the alleged concern on the part of the Chinese government.

One industry observer said that when SemiLEDS(LEDS) went public last week, its officials were playing up the idea of Chinese companies beginning to manufacture the same equipment as Veeco and Aixtron. The industry observer said that the call from Citi to downgrade shares isn't surprising since this anecdotal evidence has been making its way around the market in the past few weeks. Yet, again, the idea that Chinese equipment manufacturers will come to compete with Veeco and Aixtron is nothing new, and Veeco officials more or less assume that it's ultimately going to happen.
No. 2 Reason the Veeco Selloff Might be Overdone:
Even for investors selling on the Citi downgrade, consider the analyst's new price target for Veeco: $50 as opposed to the previous target of $52.

Veeco shares ended the day at $42.19, losing close to $8. So by Citi's own investment logic, Veeco is a buy immediately when the market's open tomorrow.

Citi reduced its 2011 earnings outlook for Veeco by a huge amount, cutting Veeco 2011 earnings from $5.72 to $3.88, way below the Street consensus of $4.93. However, Citi kept 2012 earnings per share for Veeco at $5, saying that an order slowdown in 2011 would lead to better conditions in 2012. It might just be that investors don't want to wait that long.

And this type of thinking leads directly to the most likely reason for the size of the Veeco selloff...MORE 
As one of my mentors used to say, "Definitely not for widowed orphans" 
Some of our prior post on Veeco: 
Oct. 26 
LED Stocks: FAIL (for now) Veeco Reports, UBS, JPM, Citi Like, Market Doesn't (VECO)
Oct. 19 
LED's: Barclays Starts Veeco At Overweight; Cree, Aixtron at Equal Weight (AIXG; CREE; VECO)
Oct. 8 
"LED Stocks: More Bad News From Display Market" but the Stocks Don't React (AIXG; CREE; VECO)

Sept. 9 
"Will the Bleeding End for Cree, LED Stocks?" (AIXG; CREE; VECO)
Sept. 8 
"LED Stocks Tumble As Avian Downgrades Veeco, Aixtron" (AIXG; CREE; VECO)
Sept. 1 
LEDs: Kaufman Sets Buys On Veeco, Aixtron; Starts Cree At Hold (AIXG; CREE; VECO
Aug. 5 
LED Stocks Clobbered On Report Flat Panel Makers Cut Orders (CREE; VECO)

July 27 
Lighting: Veeco Crushed the Street (VECO)
July 19 
Lighting: Big Orders Coming for Veeco, Aixtron--UBS (VECO)

July 15
Lighting (and more): Veeco: Piper Downgrades, Slashes Price Target; Shrs Trade Off (VECO)
July 8 
Sterne Agee Sees Tight LED Supply: Starts Cree, Aixtron and Veeco at "BUY"

June 30 
Lighting: Veeco Instruments Catches a Reiterated Buy Rating from Citi (VECO)
May 14 
Step away from the Monitor, there is something Big going on in the real World: LED Lighting (CREE; GE; PANL; PHG; UTEK: VECO)
Between the end of April and this morning the stock dropped from the low fifties to the low thirties and back to Monday's $49.97.
Action Baby, Action!