Veeco's Long-Term Growth Prospects

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Nov 26, 2014

In this article, let's take a look at Veeco Instruments Inc (VECO, Financial), a $1.47 billion market cap company that designs, manufactures and markets equipment to make light emitting diodes (LEDs), solar panels, hard-disk drives and other devices.

Upcoming future

The growth potential depends on the adoption of LED technology. The growth driver will be the general lighting market, and the company is well positioned to benefit from growing LED adoption.

Risks

The main risk the firm faces is a change in government policies. We are thinking about a change in the use of traditional lighting technologies. Further, new technologies developments could be alternatives to LED devices. The data storage, LED, and solar markets are extremely competitive so these remain as a potential risk in the next years.

Revenues, margins and profitability

Looking at profitability, revenues declined by 6.03% and led earnings per share decreased in the most recent quarter compared to the same quarter a year ago (-$0.35 vs -$0.16). LED and solar revenue constitute about 80% of total revenue during the third quarter, and we expect this trend upwards in the future. The net income has decreased by 131.9% when compared to the same quarter one year ago, from -$6.03 million to -$13.98 million.

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 -4.03
AMAT Applied Materials, Inc. 14.79
CAJ Canon Inc 8.87
 Industry Median 4.25

The company has a current ROE of -4.03% which is lower than the industry median and the one exhibit by Canon Inc. (CAJ, Financial).In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Applied Materials (AMAT, Financial) could be the option. It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.

03May20171246191493833579.png

Relative Valuation

In terms of valuation, the stock sells at a price-to-book ratio of 1.86x indicates a discount versus the industry average of 1.91x while the price-to-sales ratio of 4.08x is above the industry average of 1.80x.

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 $13,776, which represents a 6.6% compound annual growth rate (CAGR).

03May20171246191493833579.png

Despite the weak earnings results, the stock is now trading at a higher level when compared to one year ago.

Final comment

Veeco is a leading supplier of manufacturing equipment to many tech industries, like the disk drive, LED and solar cell markets. It is a dominant supplier of process equipment to this industry, with a scale and a product portfolio that are not similar by peers.

Caxton Associates (Trades, Portfolio) and First Pacific Advisors (Trades, Portfolio) added this stock to their portfolios in the third quarter of 2014.

Disclosure: Omar Venerio holds no position in any stocks mentioned