Veeco LEDS market down with guidance

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.

Robert Half Set to Continue Gains?

Robert Half International RHI is an interesting stock to look at because its earnings and –more importantly- its share price drivers and prospects tend to reflect macro-economic concerns rather micro. It is a very cyclical stock. Analysts waste a lot of time trying to analyze the finer detail of Robert Half’s numbers and execution, but in reality it is the employment environment that governs its prospects.

Having noted that, it is worth noting that this doesn’t preclude individual company analysis of Robert Half. Rather, it means that an analysis should focus on the macro-economic direction (employment gains) and then appraise prospects based on the performance of their execution. For example, the following data is a good example of how cyclical this stock is.

The first column represents a metric to analyze the turning point in Robert Half fortunes. The quarterly revenue is divided by the rolling yearly revenue. The second column is the quarterly Gross Margin. The third is the private non-farm payroll net 3-month, taken from the Bureau of Labor Statistics.

The green number represent bottoms or troughs, whereby the direction afterwards is upwards. Similarly, the red numbers are tops or peaks.

	Quarter Rev as percentage of Rolling Year Revenue	Quarter GM	Private Non-Farm Payrolls 3 Month Net
2000	0.00%	42.83%	649
q2	0.00%	43.13%	311
q3	0.00%	42.92%	440
q4	26.15%	43.11%	289
2001	25.82%	43.24%	-126
q2	23.44%	42.04%	-645
q3	21.71%	40.13%	-634
q4	20.82%	39.61%	-908
2002	21.28%	39.47%	-379
q2	23.34%	38.70%	-165
q3	25.03%	36.18%	-165
q4	25.12%	35.79%	-64
2003	24.78%	35.85%	-309
q2	25.16%	36.73%	-53
q3	25.88%	37.34%	188
q4	26.21%	37.21%	303
2004	27.59%	37.74%	489
q2	28.73%	39.71%	628
q3	29.03%	39.87%	294
q4	28.19%	40.21%	489
2005	26.80%	40.75%	471
q2	26.79%	41.18%	752
q3	27.03%	41.06%	545
q4	26.50%	41.47%	542
2006	26.87%	41.66%	869
q2	26.70%	42.57%	262
q3	26.76%	42.06%	336
q4	26.42%	42.55%	384
2007	26.33%	42.00%	478
q2	26.52%	42.88%	234
q3	26.29%	42.48%	-108
q4	26.26%	42.92%	185
2008	25.68%	41.68%	-155
q2	25.25%	42.19%	-644
q3	24.03%	41.65%	-1060
q4	21.51%	40.65%	-1948
2009	19.61%	35.67%	-2257
q2	20.14%	35.34%	-1435
q3	22.07%	36.70%	-698
q4	24.28%	37.77%	-270
2010	24.98%	36.51%	236
q2	25.90%	37.69%	353
q3	26.70%	37.82%	372

Source: Robert Half,Bureau of Labor Studies, Earnings View


The key is to note how closely correlated Robert Half's cyclical fortunes trough with a bottom in private non-farm payrolls. However, it is worth noting that Gross Margins continued to rise, right up til the employment market turned with the recession in 2008. In fact Robert Half's share price did well (although there was some stock specific weakness in mid 2006) right up until the start of 2007.

All of which indicates that there is probably more to run from Robert Half in terms of Gross Margins, share price and profits. However, it appears that Robert Half's share price is far more dictated by the direction of employment gains/losses than an underlying current profitably. If you think the economy will continue to improve in 2011 and payroll gains will remain positive than RHI has further to run.