Order inflection point in sight
In our February and April articles on Veeco (NASDAQ:VECO) and the LED industry, we said that consensus had adopted overly aggressive expectations on LED manufacturers, suggesting limited upside going forward for these stocks. We added that it was time to switch from LED manufacturers to equipment player Veeco as the inflection point was coming and as consensus remained overly conservative on equipment names due to still weak order intakes.
In line with our thesis, LED manufacturer Cree (NASDAQ:CREE) disappointed once again in Q4 with revenues up 16% but 2% below expectations and with a Q1 EPS guidance ($0.40-0.45) below consensus ($0.46).
Equipment player Veeco did better as it reported a Q2 beat (-$0.16 EPS vs. the Street at -$0.18). But as usual, the company provided a conservative guide (Q3 EPS of -$0.07 to -$0.15, below consensus of -$0.04). Also of note, Veeco's MOCVD (LED-driven) orders were down -10% quarter-on-quarter to $75m.
Against a backdrop of rising LED factory utilization rates globally, this order weakness at equipment makers Veeco and Aixtron (NASDAQ:AIXG) has been a source of concern for investors. But we believe that they could see some light at the end of the tunnel pretty soon.
Indeed, it looks like order weakness has been mainly due to customers waiting for Veeco and Aixtron to ship new tools in H2 as Veeco's CEO commented during the Q2 conference call that "the industry knows there's new tools coming from Veeco, and new tools coming from Aixtron. And so, people are going to order things just as they need them, and hold off a little bit. But the trend is good." This suggests that pent-up demand has been building in recent quarters and that orders and revenues will materially pick up soon.
Attractive risk / reward heading into H2
In all, we are pretty confident that the order momentum will improve in coming quarters when Veeco starts shipping its new tool. Interestingly, this rising confidence in the revenue outlook comes at a time of increased financial discipline, with Veeco announcing a 10% headcount reduction in its data storage segment that will lower opex by $16m annually starting in Q1 15. This suggests significant earnings leverage going forward, assuming the top-line recovers as we expect.
In conclusion, we reiterate that the bar is set low for upcoming earnings releases, offering a very attractive risk / reward. The downside risk is obviously limited in view of low expectations (orders have been low now for several years). And the upside could be huge if our bull scenario materializes as Aixtron and Veeco could benefit from both higher bookings and rising prices and as both stocks display a high beta.
Veeco is in our view much more attractive than Aixtron as the company enjoys a stronger competitive position (the cost of ownership of its equipments is much lower) and as it gains market share, as illustrated by the discrepancy in recent order bookings.
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