Veeco, Aixtron Downgrades Stall LED Stocks

(Veeco, LED stock downgrade story updated for analyst comment)

NEW YORK (TheStreet) -- Downgrades of Veeco (VECO) and Aixtron (AIXG) have put the brakes on a recent rally in LED lighting stocks.

Citigroup downgraded Veeco, one of the two core LED market equipment companies, while Kaufman Brothers downgraded shares of Axitron. The ratings changes were from a buy to a hold on Aixtron and Veeco, though the reasons behind the downgrades were two-fold.

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 policy change in China, and the LED stocks will be under the gun once more.

Citigroup is stoking renewed debate about China slowing its subsidy support for the purchase of the MOCVD equipment sold by Veeco and Aixtron.

Veeco has a larger business selling to Chinese LED companies that have benefited from the subsidy support. For at least half a year the argument has raged as to whether the Chinese government wants to take a breather from the pace of expansion in the LED market.

Veeco shares were down 5% at the open and late in the morning that loss almost doubled to near 9%. Aixtron shares were only down between 1% and 2%.

Kaufman Brothers is making a straight valuation call on Aixtron in its downgrade to a hold. This straight valuation call, as opposed to a call on changing industry dynamics as in the case of the Citi downgrade of Veeco, might account for the big selloff in Veeco, while Aixtron is only down slightly.

Aixtron shares have spiked from $24 to $37 over the past three months, while Street forecasts have moved higher, limiting potential upside. Kaufman also noted that "a potential shortage of sapphire wafers could delay some demand for new MOCVD tools in 2011. With all of these factors in mind, we believe the stock is now fairly valued for its near-term prospects," the Kaufman analyst Jeff Bencik wrote in a research note on Tuesday.

Veeco shares are up 33% over the past three months as its shares rose from a share price as low as $33 in September to just short of $50 at the close on Monday.

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