Merrill note on VECO after Aug 10 conference. Stock is getting killed today in the wake of CREE's report, now down over 13% to $32.23.
Thesis intact
VECO presented at a competitor’s conference today, and the management
reiterated their guidance and optimism on the LED cycle. We expect VECO’s
bookings to grow in C2H10. While concerns around sustainability of China
subsidies might be an overhang on the stock, we believe the broadening
customer base could lead to lower LED costs and potentially catalyze the general
lighting cycle.
Pull back creates opportunity
We expect VECO’s stock to remain volatile near-term. Concerns around LED TV
inventory, etc has lead to a pull back in the stock, which we believe gives patient
investors a buying opportunity. While arguably the backlighting cycle is mostly
discounted by the stock (could reach 100% penetration by 2012 for some panel
makers), the general lighting adoption is key to driving the next leg of the LED
cycle.
General lighting cycle is the real opportunity
Last week at Aixtron’s analyst day, management stated it expects over 30%
penetration rate of LED’s in general lighting by 2014. Interestingly, the adoption
rate seems to be growing rapidly in Japan. Aixtron believes the LED price for
residential adoption needs to be around $15-$20 per 60W versus the $45 price
point (from Samsung) today.
Price objective basis & risk
As VECO's business units are on diffferent growth trajectories, secular versus
cyclical for LED and non-LED respectively, we value the company on a sum of
the parts basis. We split VECO's 2011E earnings 90/10 between LED and non-
LED and use peer multiples for each segment. Aixtron is the pure play
comparable for the LED business and we use our small cap semi cap equipment
stocks for comparison with the non-LED businesses of Data Storage and
Metrology. Applying a 5pct and 20pct discount to the resultant LED and non-LED
multiples to be conservative results in an approximately weighted average 12.7x
P/E on our 2011 EPS estimate of $5.15 for a $65 PO
Risks are the cyclical nature of core data storage and LED capital spending that
could temporarily break growth momentum, execution on introduction and timing
of adoption of new products, revenue recognition timing on new products,
execution on the cost-reduction programs, and competitive and pricing pressure
that could slow margin improvements. |
