NEW YORK ( TheStreet) -- The LED end-market players already had their chance to move the needle on earnings, and Cree ( CREE - Get Report) and SemiLEDs ( LEDS - Get Report) dialed back investor expectations, and took big hits on recent earnings disappointments. Now it's the turn of the LED equipment makers, with Veeco Instruments ( VECO - Get Report) set to report after the close on Monday.

With the cracks exposed in the immediate outlook for Cree and its competitors in the lighting market, investors and the Street will be looking for any sign of weakness from Veeco Instruments. Veeco, like its LED peers, tends to trade with volatility after earnings, yet it's a more distinct trade than the one made on the LED end market companies like Cree.

With Veeco, it's not a story about short-term pricing weakness among the general lighting market customers, or about the pace of street lamp adoption in China specifically, which took down Cree. In its core market of LED equipment sales, the Veeco trade is based on the amount of equipment buying taking place in Korea, Taiwan and China, and specifically, any slowdown in Korea and Taiwan being offset by incremental sales in China.

At a larger level, the Veeco long-term story is hinged to the Chinese government policy for subsidizing the continued growth of the LED manufacturing market. Any indication that China will, in fact, be easing up on support for the LED equipment plants, and the market will react negatively.

These aren't new factors, but staples of Veeco earnings and outlook.

In Veeco's case, there is the chance that short-term revenue vulnerability appears in the fourth quarter results, too, and is a microcosm of these longer-term trends. Last quarter, Veeco stated that some orders from Korea and Taiwan that had been expected for the fourth quarter were being pushed out to the first quarter. However, the company said that orders from Chinese customers, "many of whom are currently building or expanding their facilities," would make up the difference.

Bill Ong, analyst at Merriman Curhan Ford, says that this comment about Chinese sales offset is dependent on Chinese plants getting up and running quickly, and there's a fair chance that some facilities didn't ramp as quickly as thought, pushing out orders in China, and not providing the offset that Veeco expected.

The Street consensus is for Veeco Instruments revenue of $302 million and earnings per share of $1.61.

Veeco has forecast revenue of $285 million to $320 million for the fourth quarter, a wide range, taking into account the short-term order delays in Korea and Taiwan, as well as the China ramp issue.

The Merriman Curhan Ford analyst said coming in at the low-end of the revenue range would probably be OK, but it will be disconcerting for investors if, after providing the wide revenue range, Veeco still falls below the low-end. "I don't think will it be flat on earnings. People have strong opinions on this name," Ong said.

Patrick Ho, analyst at Stifel, said Veeco shares will remain beholden to the industry-wide fears about a slowdown in China -- fears that he shares, and which lead him to a hold on Veeco.

"Despite everything that Veeco has done well, based on industry fundamentals, the next 6 to 12 months are full of concerns, and any sign of weakness and Veeco shares will sell off. I don't think we will get the Cree or SemiLEDs kind of cracks this quarter, but one can't ignore the fact that Veeco end customers are probably feeling that pressure," the Stifel analyst said.

The recent cracks exposed in the general lighting market ultimately circle back around to order purchases from Veeco customers, even if it doesn't show up as quickly as it does in results from an end-market player like Cree. Stifel's Ho noted that much of the strength in the LED equipment market over the past few years has been about the growth in the flat-panel display market for LED backlighting. If backlighting slows as a driver for these companies, and the general lighting market as a whole reflects the recent Chinese street-lamp dynamic -- a slower adoption rate than previously anticipated -- these factors could result in a weaker Veeco outlook.

Merriman Curhan Ford's Ong noted that Korea and Taiwan are expected to dial back spending in 2011 given the recent excesses in the flat panel market. Thus, the critical offset is that China continues to invest -- and not just as Veeco noted in its previous fourth quarter outlook, but for the full year. If Taiwanese and Korean customer spending is slowing and Veeco hints in any way that China may be applying the brakes, the stock will take a hit.

It doesn't mean that China is not committed long-term to the LED market. It doesn't mean that there isn't still huge potential in the LED backlighting penetration of the display market -- some estimate that LEDs have only penetrated 25% of the overall market. Yet short-term hiccups within the longer-term trends could make or break these stocks.

On the Chinese subsidy risk, Stifel's Ho pointed to the polysilicon production market, where China is now reportedly planning to shut down any polysilicon plants producing fewer than 3,000 metric tons. The polysilicon production market was one where China heavily subsidized the market ramp before recently deciding to force consolidation. The analyst said these kinds of examples of a shifting subsidy landscape and consolidation within high growth industries make him nervous for the LED equipment players. It's not a new fear, but it's a fear on which these stocks trade, and for which the quarterly and full-year outlook from LED equipment players remains a key "tell."

Veeco's guidance for the first quarter and its full year outlook may still be healthy given the long lead times for equipment purchases, and any "cracks" may not show until the March quarter, Stifel's analyst said. Nevertheless, Ho said he is currently at a hold on Veeco because it is hard to be aggressively buying at current stock valuations with the risks inherent in Chinese policy.

The risk of Chinese subsidy reductions hit Veeco hard in December, when Citigroup downgraded the stock based on reports that China was already moving ahead with subsidy cuts.

Veeco Instruments shares have been stuck in a mid-$40s range for much of January and so far in February -- below its 52-week high above $54 -- while its main competitor Aixtron continues to trade near a 52-week high.

Merriman Curhan Ford's Ong thinks one reason why Veeco has been trading in the mid-$40s range is because of the lack of resolution on the China subsidy issue. Investors who want to go long Veeco shares are afraid of the China subsidy risk, but investors who want to short the stock don't have the conviction on which way China policy will swing, and whether long-term support for the LED market could balance any subsidy declines for LED equipment specifically.

For Cree and SemiLEDs, the business weakness was in the here and now, amid a big long-term opportunity. For Veeco, the weakness is still primarily theoretical, and investors will be looking to its 2011 outlook as a sign of Chinese fears being realized.

"General lighting is a huge opportunity, but my concern is that it's a lot slower being adopted than people think," Stifel's Ho added.

In fact, the analyst comment is typically the framework for trading in the LED stocks. Throwing out big numbers about the long-term opportunity in general lighting doesn't often win the battle against short-term supply/demand concerns, even if, in the end, it seems likely to win the war.

-- Written by Eric Rosenbaum from New York.


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