Pacific Crest Favors Veeco Over Cree In LED Sector

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Pacific Crest analysts, Daniel Baksht and Weston Twigg, favored Veeco Instruments Inc
VECO
over Cree, Inc.
CREE
in the LED sector. Both the analysts believe that they were on the cusp of a favorable inflection in the light industry. The two analysts also felt that both the companies benefiting from LED lighting adoption pace. However, the stocks were rated differently by these analysts in their initiation. While the brokerage has initiated with an Overweight rating on Veeco Instruments shares with a price target of $23, it initiated a Sector Weight rating on Cree shares with a price objective of $24. Though they pointed out that investor sentiments remained negative for both stocks since they trade near the multiples, the two analysts have high conviction of a rebound in demand by next year. Early Stages Of Adoption The two analysts believe that the LED lighting market is in the early stages of adoption. Therefore, they expect a positive inflection for four reasons. While the first reason is that LED prices and efficiency would improve every year, the second related to LEDs enabling smart lighting, which, in their view, could boost the potential long-term payback of an LED light. The third reason is the biggest companies in the world are growing their LED lighting sales whereas traditional lighting sales were seeing reversal of fortunes. The fourth and final reason is that LED lighting in North America has penetrated, in their view, just ~5% of the installed base. Therefore, Pacific Crest analysts expect the LED lighting market to grow rapidly than the LED chip market. The analysts said, "We believe the global LED lighting market will grow to $39 billion by 2019, up from $21 billion, with companies differentiating themselves based on product, brand and sales and distribution channels. We believe the LED chips and components market will grow more slowly, up to an estimated $18.5 billion by 2019 from $17.0 billion, with companies competing for share based primarily on price and quality." Leader In Thin-Film Equipment The advantage that Veeco has is that it enjoys a leadership position in thin-film equipment for LED chip manufacturers. The company holds a leading market share of +75% in the production of front-end equipment for producing LED chips. The analysts added, "We expect revenue to decline by 36% in 2016 and increase 32% in 2017 as demand for its equipment rebounds due to growth in LED lighting. We believe the risk/reward is attractive as VECO trades near trough multiples and at a discount to peers. Our price target is $23, or 1.2x 2017 EV/sales." On the other hand, Cree is focused on LED lighting in North America. The company is a vertically integrated LED company with a focus on the downstream LED lighting segment in North America. Baksht and Twigg said, "We believe the North American lighting market could grow to $11 billion by 2019 from roughly $6 billion today, and Cree should benefit from this trend. We have concerns whether Cree can maintain its share of roughly 15% in the North American LED lighting market given increasing competitive threats. We see fair value around $24, which is 20x our C2017 EPS estimate." While Veeco shares traded 6.3 percent higher, Cree shares traded 0.4percent lower on Friday.
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