The Spell Is Broken For Veeco Instruments

Sep.29.11 | About: Veeco Instruments (VECO)

Veeco Instruments (NASDAQ:VECO) has been through a lot of wars and has logged the hard miles since its founding in 1945. You don't stick around that long in the technology industry unless you can adapt to new innovations and paradigm shifts. Currently, they are locked in combat on many fronts: the cyclical nature of the semiconductor sector, investor psychology, and, the growing global sovereign debt crisis. Somebody threw a wrench in the works, and Veeco's shares dropped from $57 on May 31st, to its current price of $28. That's a 50% decline in only four months. Traders took the hide out of it.

This is a follow-up to my initial February 24th, 2011, article, "Veeco Instruments' Upside? Depends What Uncle Sam Does." At that time, the equity had just about reached a boiling point, but this is in hindsight. Very few predicted that the stock would take a nosedive because green technology securities were in vogue, and it looked like Veeco would continue its ascent. The manufacturer of LED and Solar Process Equipment had a terrific two year run beginning at $3/share in 2009. It really amped up earnings before it hit the skids. A twenty bagger if you'd bought at the bottom.

There are many benefits to alternative energy sources, but they aren't cost-efficient unless backed by government subsidies. Even in his January State of the Union Address to Congress, President Obama referred to his push into renewable energy as "our Sputnik moment." You can make the argument that both the Soviet Union's and the United States' space programs were great for national unity on both sides of the Cold War, but they also cost a lot of money.

As much as I believe in green technology, there are other issues which have taken center stage both here and abroad to siphon off taxpayers' dollars. Renewable energy got caught in the cross-fire, and, as much as Wall Street likes growth, I believe this security has more room to go on the downside because earnings and margins are contracting.

On the margin front, CEO John Peeler states in the July 28th, Q2 Conference Call: "... we expect Q3 margins to temporarily to dip down to 47% or 48%...This will likely be a one or two quarter situation and Veeco's overall gross margins should tick back up to the 50% level." Or will they? Earlier in the conference call he explains: "In the short-term we think that MOCVD (metal organic chemical vapor deposition) orders will likely be impacted by near-term LED backlighting demand and global macroeconomic concerns." I'm from the school that these global macroeconomic concerns may be looming larger than what most CEOs are saying in their conference calls.

Belt-tightening is not only happening in Europe and the United States, but in the Asian countries too. The majority of Veeco's customers reside in China, Taiwan, South Korea and Japan, and, all of these counties have ambitious LED adoption policies. For example, China's goal for LEDs is to be 30% of general lighting by 2015. However, this could very well change with a world-wide recession or depression. The next few quarters may really rattle investors along with government policies. The globe has not decoupled, at least in my book.

On the earnings side, analysts do not believe that Veeco can maintain its record shattering growth next year. Consensus earnings estimates on Yahoo Finance are $5/share for 2011, and, only $3.43 for 2012. The lowest estimate for next year is for $1.80/share. If those anemic valuations are obtained, then the stock would go down in flames one more time. The optimistic valuation for 2012 is $6.35/share, but I just don't see that. At least from reading the last two earnings call transcripts.

As a long-term play, this is a solid organization, and, is taking market share from its rival Germany's Aixtron. It's also in the forward looking industry of renewable energy. We are not in the rotary phone era; we're in the smart phone era, and Veeco Instruments should be commended on the steps they've taken to be one of the leading companies in the alternative energy space. That said, investors now only hold stocks for a matter of months, as opposed to a matter of years, the way they did it 40 years ago. It's a traders market now and I believe there is more downside to go on this security as investors continue to bail on the market.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I am short the market with inverse ETFs.