|LED Street Light|
LED equipment manufacturer Veeco reported record results but disappointed with guidance. The stock is down in the after market. I previously featured LED manufacturer stock Cree in a previous article which you can find via this link
Turning to what Veeco said in these results...
“Q1 2011 revenues will be lower than Q4 2010 because we are planning to ship 12-20 MOCVD reactors in the new MaxBright “cluster” format, and will not be recording any revenue on these systems in the first quarter. Timing of revenue is also being impacted by the longer order-to-revenue cycle times associated with the high percentage of business currently coming from China, primarily due to customer facility readiness. The average time to convert orders to revenue is currently several months longer in China than in other regions.”...and this means that Veeco's end customers in China have started to slow spending. Since Korea and Taiwan have already slowed spending growth than this is an unwanted-if not unexpected-development.
It is not unexpected because Cree and SemiLEDS had previously made noises about a pause in China street light demand and an inventory work down with their LED bulb customers.
Conclusions for Veeco, SemiLEDS and Cree?
Veeco is higher up the supply chain, so it usually takes a while to feed through. However, Veeco are seeing the slowdown relatively early on. This suggests that there is an issue of over capacity in the industry. This capacity will only be utilised if/when China restarts spending on street lighting. Furthermore, any subsidy cut will hurt the industry on the whole. I'm also somewhat concerned by the possibility for European austerity measures to reduce growth.
Despite the fall from $63 to $52 Cree stock is hardly cheap on a forward PE (June 2011) of 22x and investors will want to wait to see when/if the Chinese resume spending on LED street lighting. I would look to SemiLEDS next results before taking a definitive view.
In the last results SemiLEDS made specific mention of pricing pressures and this is widely believed to have come from Cree. This sort of activity is usually a sign of over capacity and does not auger well for Veeco or indeed for Cree and SemiLEDS. All three stock prices have been weak. Furthermore, gross margins for all three of them could come under pressure, unless end demand picks up. No need to rush in just yet.