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Choppy Markets Turn Rough for Aixtron
09/19/2011 4:27 pm EST
Quite a change from Aixtron’s last guidance back on July 28.
At that time, Aixtron (AIXG), a leading maker of equipment to manufacture LEDs, said that although it believed that the choppy waters of the second quarter were likely to continue in the third quarter, the company remained optimistic about achieving its original targets for the full year.
On September 15, however—just two weeks before that choppy third quarter closes—the company cut its revenue and earnings guidance significantly for 2011.
Customers are delaying orders, and Aixtron sees revenue it counted on for 2011 shifting into 2012. To be prudent, the company also decided to take $140 million out of its order backlog, to account for the chance that customers will cancel orders completely.
The guidance didn’t amount to throwing in the towel, but it is recognition that the global slowdown isn’t just choppy waters. I don’t think this is worse than Wall Street and investors were expecting—and you could make an argument that the stock is now fairly valued.
You could—but I won’t here.
Investors don’t know, and can’t know, that this is the worst that it will get. And while I think the shares now trade at a very attractive price if Aixtron’s forecast holds, I won’t put any weight in that forecast until I see if the third quarter—scheduled for reporting on October 27—shows that the situation is no worse than Aixtron’s management thought just two weeks before the end of the quarter.
The new guidance is a big step down from the former projections. In July, Aixtron was talking about revenue of 800 million to 900 million euros. The September projection looks for 600 million to 650 million.
And since this projection is for the year as a whole, it translates into a very big hit for the second half—a decline in revenue for the last half of 2011 of roughly 50%.
Aixtron also cut its projections for EBIT (earnings before interest and taxes) profit margins to 25% to 30% from the previous guidance of 35%.
A recent update from Credit Suisse on trends among Asian LED makers shows the source of Aixtron’s problem. Demand is down, prices are way down, and manufacturers are stretching out their capital budgets.
This trend has been made worse by the end of subsidies in China to buy MOCVD equipment (that’s metal organic chemical vapor deposition, to you and me).
For example, Epistar, the largest manufacturer of LEDs in Taiwan, and a specialist in high-brightness LEDs used in general lighting, traffic signals, mobile phones, and laptops, told Credit Suisse that it “might” cut capital spending by 65% in 2012 from 2011 levels. Another, Formosa Epitaxy, told Credit Suisse that it plans to cut capital spending by 33% in 2012.
What puts a stop to this kind of retrenchment? In the short term, a big pickup in demand from companies such as Samsung that use large quantities of LEDs in products such as TVs could make this downturn a blip in the long-term LED story.
That could happen in the last quarter of 2011, but LED makers told Credit Suisse they weren’t optimistic about any significant improvement in 2011.
Otherwise, we’re looking at a problem that will require consolidation, as smaller companies get bought or go under, leading to improved prices for the survivors, leading finally to new equipment orders as capital budgets stabilize. (Some new subsidies in China would help.)
I don’t expect that orders for new equipment will dry up completely, because the newest generation of machines from Aixtron and Veeco Instruments (VECO) offers substantial improvements in manufacturing speed and costs.
But other than the attractiveness of buying Aixtron shares at a two-year low, I don’t see anything to move this stock up significantly in the near term. And my guess is that investors looking for an end-of-year loss to offset any profits (surely someone has some left from the beginning of the year) will find Aixtron an attractive candidate for tax selling.
So what do you do if you own these—and the stock is member of my Jubak’s Picks portfolio, where I’m looking at a 47% loss since November 16, 2010? I
f you’re optimistic about the direction of the general market in the short term, you can hold onto these shares for a bounce before selling. You can sell now if you can use the end of the year tax loss.
If you like the long-term prospects for this company and the industry, you can trim positions to a level that won’t cost you too much money if the LED markets weakens further, but that will keep your eye on the stock so that you can catch the recovery in the sector (whenever that might be).
The one thing I don’t recommend right now is buying more to double down on this pick. The payoff on that is too far away, in my opinion, to make it attractive. At least wait until the end of the year tax-selling tide recedes in December to see what you might want to do with these shares.
Sometimes the best thing to do is admit that you got one way wrong—and I certainly did with this one—and move on.
Full disclosure: I don’t own shares or units of any of the companies or partnerships mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Aixtron as of the end of June. For a full list of the stocks in the fund as of the end of June, see the fund’s portfolio here.
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