LED Stock Winners: Aixtron, Veeco

LED equipment makers recover from a recent stumble as reports suggest big Chinese buying of equipment in 2011.
By Eric Rosenbaum ,

NEW YORK (

TheStreet

) -- The sentiment in LED equipment stocks has changed yet again. Just a few weeks after a Citigroup downgrade of

Veeco

(VECO) - Get Report

led to a slide in the shares of Veeco and its main competitor

Aixtron

(AIXG)

, both stocks are rising again.

The trigger for the reversal in the former bearishness on the LED equipment making outlook came from a usual source: an anonymously sourced report in

Digitimes

indicating that China would be ordering as many as 700 to 800 LED tools in 2011, more than double the amount of Veeco and Aixtron equipment orders in 2010. Additionally, the

Digitimes

report stated that Aixtron had received an order of 400 to 500 LED tools from a Chinese customer, an order slated for the third quarter 2011, according to the technology news service.

Aixtron shares were up 8.5% on Thursday morning. Veeco shares were up 3.5%.

It's more noise about the LED equipment makers, but nothing has fundamentally changed. Before the Citi report and before the more recent

Digitimes

article, mid-year cuts in Chinese subsidies were expected.

The news of a big order for Aixtron was not entirely new, either. In the Citi downgrade of Veeco, the Citi analyst had speculated on a 500-tool order that Aixtron was going to receive in 2011. In fact, the Citi analyst used it as an example of the potential overheating in the Chinese LED market that the government might be looking to slow down through a subsidy cut.

>>Veeco Selloff: 7 Reasons It's Overdone

Citi downgraded Veeco on fears that Chinese subsidy cuts would limit order growth. Now the LED stocks are rising based on a bigger Chinese market than expected in 2011, and an Aixtron order that

Digitimes

is slated for mid-year 2011, just when subsidy cuts in China are supposed to limit order growth.

Based on comments from analysts covering the LED sector, the

Digitimes

outlook reflects the bullish scenario for LED equipment stocks next year, but it's not an argument that hasn't already been well understood and debated.

China may talk about overheating in its LED market, but it still wants to be No. 1 --

Digitimes

says that with the 2011 orders China will reach Taiwan's level as the preeminent player in the market -- and the Chinese larger plan for LED dominance may prove more important to the order outlook than subsidy cuts. Analysts also note that big players in China will go on ordering equipment even if the subsidy cuts are put in place; it's the smaller, less-established players trying to break into the LED market who may fall by the wayside with subsidies reduced.

Mark Miller, an analyst at Noble Financial, has previously noted that if China wants to meet its goal in LED market growth, it can't stop ordering tools. Andy Abrams, an analyst at Avian Securities, has previously noted that Aixtron's reported 500-tool order would equal Aixtron's total annual production.

>>LED Stocks: Digging a Hole to China

Yet there's a divide between China's appetite for growing its LED business, and the ever-changing inventory outlook in the flat panel display market. A larger- and longer-than-expected glut in flat panels and the growth of LEDs may slow regardless of Chinese subsidies or Chinese LED market growth targets.

Aixtron has trailed Veeco in penetrating the Chinese market, with most Street models having the split of the Chinese LED market at a 60% to 40% split in favor of Veeco.

Aixtron and Veeco took a hit after the Citi downgrade, but over the past three months, both stocks have recovered from the early fall selloff, and are up roughly 25%.

Cree

(CREE) - Get Report

was recently added to the conviction buy list at Morgan Keegan, after an analyst concluded that the inventory glut fears that sent all LED stocks south at the end of the summer were no longer relevant and the market was set to expand in 2011. Cree shares are up 35% in the past three months.

-- Written by Eric Rosenbaum from New York.

RELATED STORIES:

>>LED Stocks: Digging a Hole to China

>>Veeco Selloff: 7 Reasons It's Overdone

>>Veeco: Best in Class

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