Special K submits:
In this uncertain world when investors are scared to touch anything with a whiff of cyclicality, some incredible bargains are being thrown out there. I believe that LED technology supplier Veeco (VECO) is one of these. VECO makes capital equipment for one of the most compelling secular growth markets in technology, LEDs. The company trades at a low valuation (3.6x 2010E EBITDA, 7.8x forward earnings), generates a ton of cash and recently announced a $200M buyback. Against all this about 25% of shares are sold short, providing potential fuel for a rally. While there is a short case out there that I will address, I would argue that the shorts (especially those that shorted in the mid to high $40’s) have already made money when it is still unclear if they are right or not and face a poor risk/reward tradeoff going forward.
VECO’s primary business is designing and manufacturing metal organic chemical vapor deposition ("MOCVD") systems that are used to make LEDs or solar cells made of III-V compound semiconductors. MOCVD systems are the key process equipment used to fabricate LEDs on sapphire or silicon carbide wafers, and this is by far the most important product line for Veeco at about 80% of sales in 2H 2010, almost entirely from the LED market. MOCVD systems go for about $2.4M apiece and the market for them has been exploding this year as LEDs rapidly replace CCFLs for backlighting in LCD TVs and notebook computers. Veeco is essentially in an industry duopoly with Aixtron (AIXG), a German company. MOCVD tool shipments have grown from 45 tools in Q1 to 81 in Q2 and are expected to be in excess of 100 in Q3 and 120 in Q4. VECO is basically selling tools as fast as they can make them and last quarter they received approximately $260M in orders (106 MOCVD tools) vs. shipments of $186M (81 tools). The company is currently carrying $490M in MOCVD tool backlog, representing over 200 tools and nearly 100% of production capacity for Q3 and Q4 of 2010. Any tool orders made today essentially go into backlog for 2011, and on its most recent call the company indicated it had purchase orders not included in the backlog numbers. In the Q2 conference call and a recent investment conference the company indicated orders remain strong.