Aixtron Takes a Hit in LED Slowdown

07/08/2011 3:24 pm EST


Jim Jubak

Founder and Editor,

Shares in Aixtron (AIXG) are taking another pounding today, with the New York-traded ADRs down 4.4% at 1 p.m. New York time. (The stock is a member of my Jubak’s Picks portfolio.)

The most immediate catalyst is a cut in target price by Goldman Sachs to 28 euros ($39.76, at $1.42 to the euro), from 42 euros ($59.64). On top of that, add worse than expected earnings from LED chip and component manufacturer SemiLEDS (LEDS), announced today.

But Aixtron's pummeling dates back all the way to April 4—well before Goldman’s July 6 call. The stock is down 31% from its high of $44.16 on that date.

The wider problem is a slowdown in the LED sector that has seen growth slow at companies that sell LED lighting to consumers, such as Philips Electronics (PHG) and the Osram lighting division of Siemens (SI), or that use LEDs to make TV screens. (The slowdown has been enough to raise doubts about Siemens’ plan for an initial public offering for Osram.)

A slowdown in consumer sales has led to a slowdown in orders at the companies, such as Aixtron, that make the equipment used to produce LEDs.

The decline in orders stretches across the entire group of companies that make equipment for manufacturing LEDs and computer chips. Starting at the end of April, equipment makers such as Novellus (NVLS) and ASML (ASML) have all talked of slowing orders.

When Aixtron reported first-quarter earnings on April 28, it eked out a small 3% increase in orders from the fourth quarter of 2010. (Orders climbed 25% year-to-year.)

The fear that now hangs over the stock is that second-quarter results, to be reported on July 28, will show a drop in orders. The company hasn’t reported a sequential decline in orders since the first quarter of 2009.

To some degree, Aixtron’s level of new orders is buffered by its big sales in the Chinese market. Chinese LED manufacturers are using government subsidies to expand production and order next-generation manufacturing equipment, even as manufacturers in Korea and Taiwan talk of orders but cut back on actual order placements.

But that dependence on China for order growth is a two-edged sword for the share price in the current market, since every worry about a slowdown in China’s economy becomes a worry for Aixtron shares.

But do note that the pessimistic case from Goldman Sachs for a 4% decline in sales in 2012 is already more than reflected in the share price. The company’s reduced price target of $39.76 is almost 30% above today’s 1 p.m. share price of $30.60.

The current market price, I think, reflects considerable fear that the company will report bad news beyond the Goldman view when it reports on July 28.

The company has already guided to essentially flat quarter-to-quarter order growth. But with an order backlog of $321 million at the end of the first quarter, management is—so far—saying that its projection of $800 million to $900 million in 2011 revenue is still solid.

I think the share price is overly pessimistic now, and a report that just matches guidance could get the stock to pop. But this is a very uncertain global economy, and summer is usually a bad period for technology stocks.

I’d be inclined to wait to pick up more shares or establish an initial position until August or September, when more risk is out of the stock.

I’m certainly going to keep the stock in my Jubak's Picks portfolio, because of Aixtron’s leading technology for LED production. But I will cut my $65 target price on the shares. For May 2012, I’d put that target at $55.

Full disclosure: I don’t own shares of any of the companies mentioned in this column in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this column. The fund did own shares of Aixtron as of the end of March. For a full list of the stocks in the fund as of the end of March, see the fund’s portfolio here.

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