Veeco, Aixtron Downgrades Stall LED Stocks
(Veeco, LED stock downgrade story updated for analyst comment)
NEW YORK (
) -- Downgrades of
Veeco
(VECO) - Get Report
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.
Aixtron and Veeco are the true trading mates, operating in the same market of selling MOCVD machines to the LED manufacturers.
Yet Veeco has penetrated the China market to a greater extent that Aixtron, and therefore, a call by Citi that China is going to rein in subsidies for the purchase of LED equipment would more directly hit Veeco.
Should it, though?
It was a little surprising that in early trading Veeco was down much more than Aixtron, since the companies do tend to trade as an LED equipment play and both were downgraded on the same day.
Additionally, while the biggest difference between Aixtron and Veeco is geographic diversification of clients -- Aixtron has a larger focus on Taiwan while being slower to mainland China -- analysts say that it's not as if Aixtron is not a player in mainland China. The huge disparity in the Veeco and Aixtron trade on Wednesday caught some analysts by surprise.
The Citi analyst who downgraded Veeco made several statements showing that it's really a call on Veeco and Aixtron. He alluded to one particular larger order of 500 tools being pursued by GCL Group that has concerned the government, and that's an order the Citi analyst said is for Aixtron tools. The Citi also also made the statement that while the government LED program is building up a manufacturing base in China, "much of the money, at this point, has gone right out of the country and into the hands of VECO and AIXG - something that troubles some officials."
Additionally, there has been recent evidence of a slowdown in the Taiwanese LED market at the same time that China seemed to be set to rebound off a bottoming of the market, until Citi stoked fears of a subsidy cut. In any event, the difference between Aixtron and Veeco's business geography isn't big enough to merit a significant difference in the trading patterns of the stocks, some analysts, and seemingly the Citi analyst also, contend.
Citi's call about China and the subsidies, too, is just the latest in a long line of bearish calls that the D-Day is coming, and Citi didn't have any official confirmation of a change in goverment policy -- though it says that one city has made a pre-emptive move. The Citi analyst wrote that, at least as of now, "there is no smoking gun."
Citi analyst Tim Arcuri wrote on Wednesday, "While our discussions w/key sources in China reveal no 'official' change, we think concern is mounting around three factors: 1) the program is well on its way to a key goal of establishing 3-4 emerging Chinese LED companies (e.g. Sanan, Elec-tech, Epilight, Silan); 2) program mis-use and overheating (for example, checks indicate a unit of GCL Group is bidding a very largeorder (~500 tools) mostly w/AIXG, including many older generation tools); and 3)all of the money is going to foreign MOCVD suppliers (VECO/AIXG) and isbecoming counterproductive to the ancillary goal of establishing some domesticMOCVD suppliers. As evidence, we think one city -- Yangzhou -- has alreadystopped any future subsidies."
Citi sees the change playing out as a 2011 weakness but ultimately leading to a stronger 2012. Citi cut 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.
Notably, Citi cut its price target on Veeco from $52 to $50, but shares fell way below that call on Wednesday, near the $45 mark at midday.
LED stocks have been on a run since a late summer/early fall selloff, led by
Cree
(CREE) - Get Report
. Part of the rise is the recovery from a selloff that was far steeper than any broad market dip, however. 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.
Cree shares dropped twice as much as Aixtron shares on Wednesday morning, down close to 4%.
Last week, a report from
Digitimes
presented an aggressive outlook for the lighting market in 2011, which could benefit all the LED stocks. Based on latest data from
Digitimes Research
, the LED market will grow to $12.6 billion in 2011, up 53% from $8.25 billion in 2010. The overall use of LEDs in lighting will increase to 12.4 billion units in 2011, from 4.8 billion units in 2010.
-- Written by Eric Rosenbaum from New York.
>To contact the writer of this article, click here:
Eric Rosenbaum
.
>To follow the writer on Twitter, go to
.
>To submit a news tip, send an email to:
.
RELATED STORIES: