NEW YORK ( TheStreet) -- LED sector equipment play Veeco Instruments ( VECO - Get Report) is always a threat for an earnings-triggered "sell on the news" event, yet Veeco investors aren't waiting for Monday's after hours report to book some profits. A Barclays downgrade of Veeco on Monday morning from buy to hold, and more importantly, a price target reduction from $60 to $50 on Veeco shares, has sent the LED stock down close to 3% on Monday morning and Veeco shares were closing in on their average daily volume before the midday mark.

If Barclays chose the Monday morning before the Veeco after-hours earnings report intentionally, to get out ahead of the "sell on the news event," there are plenty of LED market concerns that would support this timing for a negative turn on Veeco shares. However, there are fair counter-arguments to be made that even for those concerned about fundamentals in the LED space, the real pain for Veeco won't show up until later in the year, and its March results, and outlook for the coming quarter, will not yet show the weakness.

Here is a breakdown of the key trading triggers to watch for in the Veeco earnings, and later in earnings season, when Veeco peer Aixtron ( AIXG) reports. Aixtron shares were down close to 2% on Monday morning after the Veeco downgrade.
  • The China Subsidy Issue
  • Depending on which Wall Street firm you talk to, Chinese government subsidies for the purchase of the MOCVD equipment sold by Veeco and Aixtron have already ended, are about to end, or government policy is so unfathomable from province to province that a bet on when the plug is pulled on these government subsidies is a fool's game.

    Yet the Chinese subsidy issue has hung over the head of Veeco and Aixtron for a year and that's not likely to change -- and at some point, as most analysts do expect that the subsidies will be reined in, it's only a matter of timing.

    Patrick Ho, analyst at Stifel said his view remains that the LED space is nearing the end of subsidies, yet as far as a trading trigger, it's not necessarily a negative for Veeco.

    The classic demand pull-in scenario could occur, with Chinese companies pulling orders into the second quarter to qualify for subsidies before they expire, and this could buoy the Veeco outlook. Andy Abrams, analyst at Avian Securities agreed, saying that if reports that subsidies will end in many Chinese provinces in June are true, then a classic demand pull-in could occur in the second quarter, and the real problem for Veeco wouldn't surface until the third quarter of the year.
  • Veeco Earnings Reaction Last Time Out
  • The last time Veeco reported, the company's guidance came up short, and in after-hours trading, the stock declined. Yet after some quick selling, Veeco shares ended the post-earnings trade with a rally, thanks to the introduction of its new cluster tool the Maxbright tool. The problem this time around is that Veeco won't get another rally on the Maxbright tool, and, in fact, the Maxbright tool could be part of weakness in Veeco's outlook.
  • Maxbright Tool Introduction
  • The Maxbright tool is sold in a cluster of two or four chambers, as opposed to the single chamber tools previously sold by Veeco. If customers are pushing out single-chamber tool orders to wait on a cluster tool, this could lead to a revenue miss for Veeco, said Abrams at Avian Securities. Yet the real issue for Veeco will be that investors are not likely to trust the company if its results or outlook are disappointing and the company points to Maxbright orders as a reason.

    Abrams said that if Veeco comes up on the short side on the revenue side, and the range would be a sliding factor of $25 to $45 million, investors are likely to read any commentary about Maxbright order puhouts as "masking something else."

    Wall Street is looking for revenue of $247 million from Veeco and earnings of $1.21. Veeco guided in its last earnings to revenue of $215 million to $265 million, which was well short of the then-Wall Street estimate of $295 million for the first quarter.

    "The potential for Maxbright to defer revenue makes it harder for everyone to see what's going on, and it wouldn't be the first time portfolio managers got nervous," Abrams said.

  • Fundamental Weakness in LED Market
  • On the flip side, Stifel's Ho noted that the LED sector earnings from the end market vendors have been poor this quarter, showing an inventory glut that has persisted for longer than expected and pricing pressure. The weak earnings from industry bellwether Cree (CREE - Get Report) and from niche player SemiLEDs (LEDS - Get Report) demonstrated this LED sector weakness. The Stifel analyst said that given the sector slump, Chinese companies, which have ravenously been purchasing MOCVD equipment, could put the brakes on regardless of the subsidy situation.

    Yet in an equipment space like MOCVD tools for LEDs, there is a 6 to 12 months lead-time until orders turn into shipments that can be booked as revenue, and that can often insulate the "arms dealers" from the weakness in end markets. "I'm negative on the space, but the March quarter shipments should track planned revenue and EPS. I'm very cautious on the June quarter outlook," Ho said.
  • Veeco Outlook
  • Stifel's Ho remarked that the Chinese subsidy and LED demand environment are two separate issues. Given the lead times in the MOCVD space the Veeco March quarter, Ho noted that they should be OK, but that the outlook for either the second or third quarter could be the big disappointment.

    Avian Securities analyst Abrams said he is less concerned with the second quarter than the third quarter. Veeco has to have orders for the full year in by August to be able to recognize the revenue in 2011, and this timing issue implies the real problem could still be one more quarterly outlook out.
  • Running out of Room for Rally?
  • Stifel analyst Ho referred to the fact that the last Veeco report was disappointing but that the stock had bounced back as a two-headed beast in trying to peg the earnings trade on the LED player. "It should be selling off, but I can't deny the fact that it held up well. Logic tells you it should sell off," Ho said.

    The fact that Barclays didn't just downgrade Veeco from a buy to hold, but lowered its price target by $10 on the morning before earnings, sends a signal about the trading tilt.

    "If they don't sell down now, Veeco shares are at the same risk level sometime in the next quarter," Avian's Abrams said.

    -- Written by Eric Rosenbaum from New York.

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