The Inflection Point's  Instablog

Veeco Instruments Inc. (VECO) is a manufacturer of enabling solutions for customers in the HB-LED, solar, data storage, semiconductor, scientific research and industrial markets. VECO has recently seen a surge in its LED and solar bookings. Additionally, if storage parts supplier XRTX’s recent earnings report is any indication, VECO should also be experiencing a strong recovery in its data storage unit. Add it all up and we feel that VECO’s estimates for Q4 and 2010 are simply too low.

VECO caught our eye in late July when the company reported an 86% sequential jump in its orders for Q2. LED & solar orders accounted for 58% of this backlog as LED manufacturers increased production for TV and laptop backlighting applications. While these orders were impressive, VECO also stated it was experiencing further momentum in the beginning of Q3, receiving orders for more than $110M of its TurboDisc metal-organic chemical-vapor deposition (MOCVD) systems from key Korean and Taiwanese LED manufacturers.

The Street quickly raised its estimates for VECO’s Q3 and Q4 after the company update in late July. During the past 90 days, estimates for Q4 have increased from a loss of ($0.02) to earnings of $0.12 a share. Estimates for 2010 have also increased from $0.22 to $0.76. These estimate increases are reminiscent of the STEC growth story earlier this year, when analysts were continually behind the curve as its business was gaining tremendous momentum and yet earnings estimates remained static.

Last week, boutique brokerage, DA Davidson, dramatically raised its 2011 numbers for VECO. In his note, analyst Matthew Petkun noted that LED production has been ramping up more rapidly than expected and the trend should continue into 2011. Based on his conversations with industry contacts, Petkun now believes that the market for MOCVD tools for LED production is more than likely set to run ahead of prior estimates over the next few years with display makers looking to ramp their capacity in hopes of  reaching 50% TV penetration by the end of 2011. With VECO in the enviable position of supplying an essential product to meet this surge in LED equipment demand, Petkun raised his estimates for 2011 from $501M in sales and $1.37 EPS to $582M in sales and $1.86 EPS.

Looking at the competitive landscape, Veeco seems poised to ultimately grab more market share from its biggest competitor, Aixtron (AIXG), over the next 12 months. With hardly any performance differentiation between VECO and AIXG and considering VECO’s throughput advantages, Veeco should be in position to take some of the formidable market share Aixtron currently enjoys.  Applied Materials could also gain share, so that is something to monitor over the next 12 months as well.

Disclosure:  We are long VECO November calls and VECO common.