Time to Step Into Aixtron

Over the last year, shares of Cree (CREE) have risen significantly, and have seriously outperformed both the S&P 500 and the Nasdaq Composite Index. All told, the stock is up more than 190% over the last year. This company makes light-emitting-diode (LED) chips and lamps, and the lift in the shares has indeed been fueled by the continued growth in smartphone, tablet and television backlighting markets. However, another driver to the stock price has been the company's inroads within the general illumination market. That's right -- you can march over to Home Depot (HD) and get a Cree 60-watt LED light bulb for roughly $75, or you can go get a 50-watt one from Philips (PHG) for $30. Either way, the LED industry is firmly marching into the general illuminating market that is billions of dollars in size. In fact, from time to time we'll hear rumors that Cree has become a takeout target for such firms as General Electric (GE). Now, I'm not here to fan the takeout flames. Rather, I'd like to revisit not only Cree shares, but those of several LED equipment stocks, given the rising capacity levels in the overall LED industry. As with most capital-equipment stocks, Veeco Instruments (VECO) and Aixtron (AIXG) tend to be cyclical in nature. When manufacturing capacity is tight, new equipment demand rebounds -- which means rising orders, revenue, margins and earnings for the equipment manufacturers. Conversely, following a period of strong demand, that excess capacity will more often creep into the equation, and demand falls for new equipment. Over time, that excess capacity is absorbed and the cycle starts anew. Right now, it looks as though we are at that point in the cycle when industry-wide LED manufacturing levels are tightening. This time, it follows last year's sharp drop in demand, which punished Aixtron and Veeco shares -- which, in turn, followed major LED investments made in 2010 and 2011, a period that had been a boom time for Aixtron and Veeco. At this point, third-party research firm IHS reports that factory utilization rates are increasing for major LED vendors in Asia. In South Korea, for instance, utilization rose to about 75% in the second quarter, up from 60% in 2012. Meanwhile, utilization for some Taiwan and China vendors reached 90% in the second quarter. Aside from those rebounding capacity-utilization levels, LED's longer-term outlook in the lighting market seems bound to spur a further recovery in equipment demand. As described by Philips, the market for lighting-system solutions is very big and includes commercial lighting, home lighting, outdoor lighting, public lighting and others. Given the share gains to be had by LED solutions vs. existing ones, IHS sees more-than-tripled global revenue for LED drivers used in general lighting applications between 2012 and 2015, with continued growth through 2018. With capacity levels already tightening, that's good news for Aixtron and Veeco shares. Again, Aixtron and Veeco are cyclical companies, like Applied Materials (AMAT) and Lam Research (LRCX) or even other cyclicals like Paccar (PCAR) and Trinity Industries (TRN). As a result, the time to buy the shares is when the outlook is poor and valuations appear high because of depressed earnings. After falling for several quarters, Aixtron's order backlog appears to have stabilized in the June quarter. Generally speaking, that's the time to start buying the shares. While Veeco reported that it is starting to see a rebound in demand for its MOCVD equipment, the company continues to work through its accounting review. Given the uncertainty in potential restatements and delays in SEC and other filings, a cloud of uncertainty is hanging over Veeco shares, which means you'd be advised to avoid them for now. The downside of rising capacity levels is that, past some point, pricing and margin pressure follow. While Cree has had the wind at its back lately, those pressures have plagued this company and its shares in the past. While it may be some time until that pressure once again rears its head, my recommendation would be for Cree shareholders to get ahead of that curve by trimming back existing positions and recycling those profits into Aixtron shares.

Time to Step Into Aixtron

The company is ripe for another boom period.

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