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AIXG: don't catch the falling knife

|Includes:Aixtron Aktiengesellschaft (AIXG), CREE, VECO

AIXG is a German company, in a duopoly with VECO, selling the equipment that makes LED lights.  They are an immensely volatile Story Stock (beta 2.75), with the stock going from $4 to $44 (2009 low, to 2011 high).  The Story: LED is a disruptive innovation, which is on the cusp of replacing incandescent and fluorescent lighting.  Manufacturing costs for LED lights, although high today, are expected to drop 30%/year.  Revenues are expected to grow 30%/year.  The equipment-makers have very high barriers to entry.

Let's look at how AIXG has performed, over the last 6 years:

FY Sales EPS Gross Margins
2005 173M -0.78 27%
2006 217M  0.10 37%
2007 295M  0.26 40%
2008 401M  0.37 41%
2009 428M  0.68 45%
2010 1030M  2.48 52%
Click to enlarge

In addition, they have no long-term debt, and 291M in cash and ST investments.  Pretty impressive: every number on that chart, gets better every year.   So, is the story real?  Yes, it is.....but don't buy the stock now.

Here's why:  The Chinese are doing, in LED, the same thing they are doing in solar.  They are pouring money into it, ratcheting capacity up far above demand.  They are deliberately causing a price war, which will drive out of business their high-cost foreign rivals.  For now, China wants market share and jobs, not profits.  AIXG's huge increase in sales, in 2010 and 2011, can't be repeated in 2012, and maybe not in 2013 either.  There is just too much capacity, now and coming on line, and the market for LED lights isn't big enough yet.

Going to Home Depot's website, I can buy a 4-pack of CFL (compact fluorescent lights), to replace a 40W incandescent, at $1.62 per bulb.  The cheapest equivalent LED light I can find, is an EcoSmart A19 bulb, for $15.97.  The LED light (Model # ECS 19 WW 120) uses 8.6W of power, but the CFL (Model # ES5M8094) uses just 9W, only slightly more.  And the CFL puts out more light, at 550 lumens to the LED's 429.   So, why would anyone buy the LED light that costs almost 10 times as much?  I don't see LED going mass market, for general lighting, until prices come down a lot.  Until then, LED simply isn't competitive with CFL.  The Story, for this Story Stock, is real, and it will happen. But not in 2011, and probably not 2012 either.

After hitting $44 early this year, AIXG has been in a powerful downtrend.  They warned today,  and fell below $17.  The stock has not been above its 50 day moving average, since April.  The 200-day crossed below the 50day m.a. in July.  There is no indication the downtrend is over.  Look at the charts of VECO and CREE, and it's clear this isn't just a company-specific downtrend.

Don't be fooled by the dividend yield, into thinking this is a value stock.  American companies try to pay a stable and growing dividend.  European companies, as a rule, pay a certain fraction of their earnings.  In cyclical industries (like the capital equipment AIXG makes), that means the dividend will vary a lot, year to year. Based on their track record over the last 5 years, AIXG pays about 1/3 of their earnings in dividends.  The last dividend was $0.84, which is a 4.9% yield at today's stock price.  But that's by far the highest dividend they've ever paid.  If I'm right about a cyclical downtrend in the LED equipment market, next year's dividend is unlikely to be anywhere near that high.

disclosure: no current position in AIXG.  I'll probably be a buyer sometime in 2012. 

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.