Friday, August 6, 2010

Thoughts on VECO After a 13% Fall

Less than two weeks ago, high flier Veeco Instruments (VECO) crushed second quarter earnings and revenue estimates and also raised forward guidance. In the wake of the strong earnings report, analysts at two firms, UBS and Merrill Lynch/BofA, raised their target stock price for VECO to $60 and $65, respectively.

VECO closed at 45.52 on Wednesday, up 2% from the pre-earnings price. Yesterday, however, the stock fell 13% to 39.61 in a move that was attributed to a report in a Taiwanese newspaper that flat-panel display manufacturers would be cutting back on LED orders.

While some analysts debated whether the market may have overreacted to this report, we were fortunate enough to have an earnings report from Rubicon Technology (RBCN), an important supplier to LED chip manufacturers, right after the market closed.

As was the case with Veeco, Rubicon beat on both earnings and revenues and also issued upside guidance. Rubicon’s President and CEO Raja Parvez had only positive things to say about demand in the LED market:

“Demand continues to be very strong from the LED market as the adoption of LED back lighting for medium to large displays such as LED LCD televisions, desktop monitors and Notebook and Netbook computers continue at a rapid pace and general lighting applications for LED continue to advance.” [see Seeking Alpha conference call transcript for more details]

In after hours trading, Rubicon was up 1.5%, while Veeco added 0.6% on low volume.

After today’s big loss, Veeco is now 29% off of its 52-week high, which was established in late April. While I generally do not trade much after hours, I did use today’s selloff and the Rubicon earnings report as an opportunity to pick up some VECO shares.

Normally after a stock is hammered and I think the selloff is overdone, I like to sell puts that are at the money and figure that if the premium is high enough, I will win whether the stock reverses course and rallies or continues to struggle, with the result that I am assigned the stock. Thanks in part to the big spike in implied volatility (see chart below) VECO’s August 40 puts, which have 14 days until expiration, were last quoted at 2.20 – 2.35. An investor could sell the puts and have a cost basis below 37.50 should they end up in the money. Alternatively, one could buy the stock and sell the August 40 calls (1.80 – 1.95) and get a 4.7% yield for two weeks of effort.

Valuation should not be a deterrent here. Right now VECO is valued at 9.0 times 2010 consensus earnings and only 8.2 times anticipated earnings for 2011.

Whether one favors stocks or options, there are a lot of interesting opportunities springing up in VECO in particular and in the LED space (including CREE and AIXG) in general.

For more on related subjects, readers are encouraged to check out:

[source: Livevol Pro]

Disclosure(s): long VECO at time of writing; Livevol is an advertiser on VIX and More

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