Citi's view of the metrology unit sale
Veeco Instruments Inc (VECO) Buy/Speculative (1S)
17 August 2010
Selling Metrology Unit - Smart Move; Maintain Buy
****************************************************************************
Timothy M Arcuri
* What happened - VECO announced Monday it reached agreement to sell its
metrology business to Bruker Crop for $229MM in cash ~2.2x TTM rev. The
transaction was approved by the Boards of both companies and is expected
to close in Q4. Not only does this allow the company to focus on
businesses with better growth and margin potential (LED/solar and to a
lesser degree, in terms of growth, data storage) but this is a solid
valuation for a business with single digit OpM.
* Better focus on growth - We have suggested VECO sell this biz on several
occasions, most recently the conference call last Q (see note dated
7/27/10). In addition to allowing it to focus development efforts on biz
with better growth prospects, it also further bolsters the balance sheet
with cash balance now ~$11.50/share following the deal and should provide
higher EPS multiple given the improved growth profile of the overall company.
* Changing estimates to reflect the sale; maintain Buy - with ~$35MM/qtr
rev for the metrology biz moving to "discontinued operation" starting
8/15, the company changed its rev guide to $255-$280MM vs. $290-$315MM,
and non-GAAP EPS to $1.13-$1.33. We are accordingly adjusting our FY10
rev/EPS to $1,071MM/$4.58 from $1,147MM/$4.89 and F2011 to $1,112/$4.66
from $1,252/$5.00. Our tgt remains at $52 as the remaining biz should
command a higher EPS multiple, closer to where AIXG trades. Our $52
target is based on ~11x multiple applied to our new C2011 EPS of $4.66.
We have long indicated VECO's orders are likely to peak in CQ3 before
re-accelerating in early to mid-2011 and have indicated that this risk
factor is discounted below ~$35. Given the current ~$32 price we feel
this is a very attractive entry point as MOCVD demand should be similar
in 2011 to 2010 meaning orders can't decline all that much or stay down
for that long as demand shifts from TV backlighting (where orders have
peaked) to general lighting, especially the supply chain buildout in
China. |
