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Veeco May Illuminate Your Portfolio

August 19, 2014 | About:
ovenerio

ovenerio

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In this article, let's take a look at Veeco Instruments Inc. (VECO), a $1.44 billion market cap company, which is a company that designs, manufactures and markets equipment to make light-emitting diodes (LEDs), solar panels, hard-disk drives and other devices.

The principal driver

The company is a leading supplier of manufacturing equipment to many tech industries, like the disk drive, LED and solar cell markets.

The key driver in the future will be the general lighting market. Veeco will benefit from growing LED adoption, as that will drive demand for Veeco's LED manufacturing tools. Many MOCVD tools will be needed as LEDs become widely adopted for much larger market application, offsetting the possible decline in the television or notebooks´segment.

Moreover, the firm focuses on cost reduction in the LED tech through larger wafers, automation and dedicated equipment.

Disk drive industry

Veeco is a dominant supplier of process equipment to this industry with a scale and a product portfolio that are not similar by peers. Additionally, the firm also sells process equipment to solar cell manufacturers but constitutes a small portion of its global business.

Leading supplier

The data storage business ‘growth was considerable, and the firm now is the leading supplier of manufacturing equipment. Veeco has more than 60% of market share of the manufacturing equipment to the data storage industry.

While the company faces fierce competition, its business also is tied to worldwide storage demand growth, a decrease in the future could impact the segment´s profitability.

Revenues, margins and profitability

The gross profit margin is 35.33% which we consider to be high, but we cannot say the same thing of the net profit margin, which is negative. Revenue declined by 2.38%, and earnings per share decreased in the most recent quarter compared to the same quarter a year ago (-$0.39 vs -$0.11).

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Ticker

Company

ROE (%)

VECO

VEECO

-5.42

AMAT

Applied Materials, Inc.

3.61

CAJ

Canon Inc

7.92

 

Industry Median

2.6

The company has a negative current ROE, which is lower than its peers. In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.

1408419267343.png

Relative Valuation

In terms of valuation, the stock sells at a price-to-book ratio of 1.7x which indicates a discount versus the industry average of 1.9x while the price-to-sales ratio of 3.93x is above the industry average of 1.7x.

As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $18,275, which represents a 12.8% compound annual growth rate (CAGR).

1408419246243.png

Final comment

Veeco is inmerse in the tech industry, the second-largest exporting industry in the U.S. Recently, there is a shift to move production to other low-cost markets, countries like China or Taiwan. Also, the industry is capital intensive with significant investments in technology.

Apart from all the things discussed in the article, it is a fact that the LED-based lighting is being adopted in a growing number of applications, and this is a very important catalyst for Veeco.

Hedge fund gurus like Chuck Royce (Trades, Portfolio) and Murray Stahl (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014.

Disclosure: Omar Venerio holds no position in any stocks mentioned

About the author:

ovenerio
We provide independent fundamental research and hedge fund and insider trading focused investigation.

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