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.
The Financial Times reports that Lloyd’s of London insurers (LYG) and reinsurers are nervously watching the progress of Hurricane Earl as it moves along the East Coast. The hurricane is the most threatening to the East Coast since Hurricane Bob brushed North Carolina’s Outer Banks and struck New England as a Category 2 hurricane in 1991. Initial reports suggest that Hurricane Earl caused less damage to the Outer Banks than initially feared but its exact course toward New England is still uncertain. The hurricane is still a dangerous Category 2 storm with winds of 105 miles per hour.
Earl is the third named Atlantic hurricane of the year and experts are predicting more activity before the hurricane season winds down in November. Tropical Storm Fiona is currently in the Atlantic with winds of 50 miles per hour and is not projected to make landfall. Two additional systems have the potential to develop into tropical storms. Earl’s current storm stack is pictured below (see the NOAA website for updated detail and storm tracks.)
The nation’s retailers have reported unexpectedly strong August sales numbers as back-to-school requirements kept shoppers from restraining their spending plans. Retailers posted strong results on the heels of solid traffic and sales, albeit backed by heavy promotion and discounting in the back-to-school season. Further, tax-free holidays also provided a boost to the overall sales of the retailers. Seventeen tax-free holidays during August lured shoppers to the malls.
Looking back to only a year ago, the recession had the nation firmly in its grip, and the back-to-school season was somewhat sluggish as consumers were determined not to spend more. High employment rates, a falling housing market index and lower consumer spending made retailers uncertain of consumer behavioral trends. But this year has come as a breath of fresh air for the retailers.
Barry Ritholtz was unimpressed with the way that the Financial Crisis Inquiry Commission was quite soft on Dick Fuld:
To think that Fuld’s brand of psychopathic revisionism was given a sympathetic hearing is deeply disturbing.
Summary of Investment Thesis
Netflix (NFLX) has a strong business operation that is highly successful and has driven strong revenue, EPS, and cash flow growth over the past several years. We expect this to continue as Netflix expands its share of the home rental market. We also believe that the company’s expanding offerings of streaming content will enhance profitability by potentially lowering churn (currently around 4.2%), subscriber acquisition cost, as well as fulfillment expenses. While we are positive on the outlook for the company we believe that near-term growth potential, we do think this company is overvalued.
Congratulations to McDonald’s (MCD). The stock just made a new all-time high today of $75.35. That’s not just a 52-week high, or a post-crash high; that’s an all-time high.
Forty years ago you could have picked up the shares for just 29 cents a piece. That’s adjusted for nine stock splits; four 2-for-1s and five 3-for-2s which equals 121.5-for-1. That’s a gain of close to 26,000% or nearly 15% a year, and it doesn’t include dividends.
Costco Wholesale Corporation (COST), one of the leading U.S. warehouse club operators, recently posted healthy sales data for the four-week period ended August 29, 2010.
The company sustained its sales momentum. After a 6% increase in July 2010, Costco’s comparable-store sales for August rose 7%, reflecting comparable sales growth of 6% at its U.S. locations and 11% at its international divisions. Comparable-store sales for fourth-quarter 2010 grew 6% with U.S. sales up 4% and international sales up 14%. The results were favorably impacted by rising gasoline prices and a weaker U.S. dollar.
When the rumor mill gets going about a potential buyout target, investors can generally become interested for one of two main reasons. The first is when the potential target has a strong foothold on technology, staff or demographics that the potential suitor perceives as essential to its future earnings growth or even survival. When this is the case, shares for the firm being bought will often have high multiples due to big R&D and other costs relative to current earnings. The buyer in this case will likely be overlooking the value concerns just to get their hands on what they so desperately need, and a bidding war can easily ensue. Because of this, however, the stock tends to rise quickly, well before any buyout is announced, and can often trade higher than what is ultimately paid.
The other less exotic scenario occurs when a company has great long term fundamentals, but has been beaten down by short term forces. The buyer of these types of companies is generally looking for a solid investment to add to their balance sheet, something that will generate income right away. When this happens, the stock will likely see less action leading up to a deal, and a premium is often paid. This is because traders believe that the potential suitors will be more likely to low-ball any offers, and will have plenty of time to wait. The financial condition of the prey in this case is often the determining factor as to what price is paid. As different as the results can be for investors of these two scenarios when the sitting ducks are eventually acquired, a further divergence in results can occur if the companies are in fact not bought out. When something that was in dire need suddenly is not, chances are it will be left on the curb. Investors holding a value play, on the other hand, may benefit from the strong fundamentals that kept them from being overtaken in the first place.
Larry Dignan (ZDNet) submits:
Apple (AAPL) is investing in its partner network, direct sales and support in an effort to take advantage of enterprise and small business interest in the iPad and iPhone.
This week, Apple’s iPod and Apple TV products dominated the headlines, but there are also a lot of emerging signs that Steve Jobs & Co. are showing enterprise gains.
While the latest sales results from automakers generally came in weaker than last year when sales boomed as a result of the government’s sham "cash-for-clunkers" policy, looking at the Department of Commerce light vehicle sales series you can see that for the better part of the last decade auto sales have been terrible, stuck in a perpetual declining trend since the late 90s with the current level of sales last seen way back in early 1983.
With the tightening consumer credit conditions, structurally high unemployment and a decade long disappointing sales trend, recent auto sales results offer an interesting data-point but essentially paints a picture of bleak economic weakness.