Friday, December 17, 2010

Veeco Intruments (NASDAQ:VECO): Bounce?

Veeco Intruments (NASDAQ:VECO) is being defended at two major firms this morning:

- UBS (Steven Chin) saying they believe Veeco’s stock has traded lower on concerns that China’s LED subsidy program may end early according to a story in the China Business News. Firm notes Jiangmen City and Yangzhou City (2 biggest programs in China) have always made it clear their 2-year LED subsidy programs which began in 3Q09 would have 3Q11 end dates. They did not change their Veeco EPS estimates just because Yangzhou City may end its program 1 month early per the China Business News.

Expect continued speculation over a new Chinese LED subsidy near term
Our discussions with 4 of the major customers in Yangzhou City found none are rushing to place orders by a 7/1/11 deadline or installing. However, customers believe details on China’s 5-year plan in 1H11 could see the LED subsidy change from equipment to applications which UBS still believes is a long term positive for Veeco. While Veeco’s q/q order growth was due to China orders in 2H10, they believe Korean orders resuming in 1H11 is a key reason to keep a Buy rating.

Korean customer equipment orders from Veeco likely resume in 1H11
Their checks found LG Innotek (Veeco’s #1 Korean customer) will spend KRW 194B (about $170M) in capex in 1H11 which we estimate is at least 30 MOCVD reactors ($75M in sales for Veeco). Firm views this as a positive inflection point as Veeco’s Korean customer orders were $0 in 3Q10 and 4Q10. They also expect Korean orders for Veeco’s new MOCVD tool could also be a catalyst in 1H11.

Valuation: Maintain Buy rating and 12-month price target of $54
UBS PT is based on 10x their cross-cycle EPS estimate of $4 plus $14/sh in net cash

- J.P Morgan is out with a note titled ' Risk/Reward Just Got A Lot More Attractive; Buy on Recent Weakness'

They rate VECO Overweight with a $75 per share price target.

Firm notes that following a round of checks across the LED supply chain, they reiterate their bullish stance on Veeco shares which are down roughly 20% on the week following poor TV sales data from Best Buy and a competitor downgrade in recent days. JPM believes both of these headwinds will prove to be temporary and sees the recent weakness in the stock as an opportunity for investors to add to their positions.

MOCVD demand from China all systems go. Their checks indicate MOCVD order momentum is likely to persist well into C1H11, driven in large part by upside at Chinese LED makers. Moreover, firm believes Veeco continues to see market share traction, in Taiwan & Korea, despite the intro of AIXG’s new G5 tool earlier this Q.

MOCVD subsidy risk overblown in near-term. While uncertainty around the status of MOCVD subsidies in China beyond their scheduled expiration in 2011 remains high, most investors have factored this into their MOCVD outlook in JPM's view. In the near-term, JPM checks suggest that there have been no official changes to any MOCVD-specific subsidy programs, with indications that, at worst, policy will simply be fine-tuned to manage more tightly the allocation of subsidies.

Subsidy mechanism to be fine-tuned (again). Rather than cut MOCVD subsidies, they believe policymakers will be emphasizing criteria such as 1) IP, 2) financial strength, 3) & long-term business model, among others to ensure companies with the potential to compete in the global LED industry are the ones being invested in. Assuming this revision occurs in the next few months, they remind investors that this would not be the first time that the subsidy program has been fine-tuned as it was only earlier this year that payouts were structured to phase in over 3 installments to ensure tools were actually being installed and run for volume production.

Best Buy data is backwards looking. The TV food chain, including LED makers, had cited some inventory-related softness as far back as 2-3 months ago, so they don't find it surprising that Best Buy's results reflected this to some degree. That being said, their checks suggest the worst of the inventory situation is now behind us with most LED suppliers expecting volumes to start growing again in C1Q11.

LED sentiment improving. JPM's recent talks with investors suggest a renewed appetite to own LED stocks heading into 2011 as concerns around TV-related inventory are quickly moving to the rear-view and general lighting demand comes more into focus. To that end, JPM notes that LED bellwethers Cree and Veeco (prepullback) are both +20% in the past month, or well ahead of S&P 500’s 5% uptick.

Notablecalls: Veeco (NASDAQ:VECO) is down 10 pts since the Citigroup downgrade on Monday (see archives) & yesterday's additional negative comments from the same analyst.

- Today, both UBS and JPM are refuting Citi's negative comments regarding Chinese subsidies. It seems each Chinese city has its own MOVCD subsidy program and the ending of one of these does not mean all of them will end.

Not saying MOCVD demand from China is all systems go but it may be not as bad as Citi thinks.

All in all, I think sentiment got all too negative all too fast. Shorts felt really comfortable yesterday driving the stock down over 4 pts intraday, which means they will be taken for a ride today.

I'm guessing VECO could see $42's again today.