A Turnaround Story in the Midst of Gloom
Harsh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Cities going bankrupt, the sovereign debt crisis, the LIBOR scandal, brokerages making merry with customer accounts; such news, among many other negative reports that we have known this year, are no less than staple diet for investors, analysts, economists and many of our ilk nowadays.
Every day, we wait to see if there’s anything new that has gone wrong, we have various data coming out which shows that the economy is slowing down; we see that a stock has been slaughtered after posting decent earnings but faltering on outlook due to the economic quagmire.
In such conditions, it would seem outlandish to talk of a company that has effectively brought about a turnaround in its fortunes this year after having a bad, bad 2011. There might be a few others who would claim to be in this category, but today, I would be focusing on one of them.
A brief background
This particular stock had lost half of its value in 2011. The reason: a weak global environment that hurt its end markets, leading to lower bookings and resulting in an industry oversupply, finally culminating into sluggish revenue growth. But, surprisingly, even though the economic conditions are no better than last year, this stock has provided an impressive and terrific year-to-date return of 68%.
The company that I’m talking about is Veeco Instruments (NASDAQ: VECO). Veeco designs, manufactures and sells components that are used in making light emitting diodes (LEDs) and hard-disk drives. Before 2011, the company had grown at a rapid pace. Its top line jumped from $252 million at the end of fiscal 2007 to $979 million at the end of 2011. However, Veeco’s revenue grew just 5% from 2010 to 2011, due to reasons outlined earlier.
But, it should be kept in mind that Veeco adopted a new course during this time. The company spun off its CIGS solar systems business in September 2011 and had also disposed of the Metrology business in August 2010. This enabled it to go forward as a leaner and more agile entity, focusing solely on the LED and storage markets that have great potential going forward.
An outstanding year so far
So far this year, the company has seen good times. It beat analyst estimates by a mile in the first quarter, backed it up with a meaty guidance and saw its shares begin the journey to the North Pole. Veeco released its second quarter results last week, matching analyst estimates on bottom line and trumping on revenue.
The company provided a decent outlook as well, projecting revenue between $120 million and $140 million, with the Street forecast of $132.6 million lingering around the mid-point. Adjusted earnings are expected to be between 22 cents and 38 cents a share, with analysts forecasting 32 cents a share. This tells me that Veeco is slowly but surely finding its footing again despite a few concerns on the way. In order to have a proper understanding about Veeco’s prospects, let’s take a look at the various puts and takes that lie ahead.
Let’s begin with the puts. First of all, the economic situation is a major drag on Veeco’s business. With LED lighting and solar business forming 63% of Veeco’s top line, and this business being directly related to consumer confidence, the company might find the going difficult in the short-term. This clearly reflected in Veeco’s LED and solar bookings in the quarter, which went down almost 72% from last year due to industry oversupply. Since the consumer is not willing to spend too much, even Veeco’s customers are cutting back, resulting in lower bookings.
Storage might be a mixed bag
As far as Data Storage sales are concerned, they trended higher in the quarter and grew 9% year over year. The increase was driven by the recovery of the hard-drive industry as customers replaced their damaged equipments. Veeco’s business was severely hit by the flooding in Thailand but seems to be getting back on track. Hard-drive maker Western Digital (NASDAQ: WDC) recently posted a blowout quarter and guided ahead of analysts for the coming year. While this seems encouraging for Veeco, in hindsight, I would say that this looks like the boom before the bust to me.
While hard-drive makers such as Western Digital might make merry and charge high prices as the industry gradually recovers from the aftereffects of the floods, they need to be aware of challenges posed by solid-state drives. Hard-drive makers won’t be enjoying abnormal profits and margins for long and will have to gradually reduce prices going forward as SSDs find more adoption. As a result, Veeco’s storage business might take a hit in the long-term.
The LED opportunity
The worldwide adoption and rapid growth of LED lighting is the primary driver of Veeco’s prospects. LED lighting is the way forward, a viable substitute for the light bulb that is in vogue. Light bulbs aren’t considered environmentally friendly due to CO2 emissions. Incandescent bulbs are going out of use in Europe and the 100-watt bulb is slated to meet its end soon due to efficiency standards.
And again, prices of LED products have been going down, which will result in increased adoption of lamps and TVs. Although this might be hurting companies such as Cree (NASDAQ: CREE), which has been feeling the pinch of declining prices, it bodes well for LED growth and Veeco. Cree’s margins shrunk to 35% in the previous quarter from 42% in the prior-year period due to drop in prices but the company is striving to develop more efficient products since it knows that clean lighting is the future.
Also, Veeco indicated towards a ramp up in utilization at fab foundries in Taiwan, Korea and China. Veeco says that its bookings have finally stabilized and a gradual recovery in bookings is expected in the second half.
For a long-term investor, Veeco looks like a good opportunity. The company is taking small but steady steps in an industry which is expected to get big with time. There might be hiccups on the way but Veeco is intent to tide over the challenges presented in the short run. Cutting across economic cycles, the stock looks like a good one to go for since its present woes are due to the economic downturn, which isn’t here to stay forever.
TechJunk13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Western Digital. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.