At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
LED's future: bright or dim?
Investors in the red-hot, cool-lighting LED industry got singed earlier this month. Recent IPO SemiLEDS (Nasdaq: LEDS ) missed earnings badly, and guided to an even bigger loss in the current quarter. So those burned investors should probably thank Wall Street firm Kaufman Bros. for delivering a cool drink of positive news this morning. Kaufman upgraded shares of LED equipment maker Aixtron (Nasdaq: AIXG ) , asserting that things aren't quite as bad as they seem.
Admittedly, Kaufman acknowledges that prospects look bleak in the LED industry today. There is end market weakness in demand for LEDs, the analyst says; manufacturers have been building too many of the things, causing inventory to pile up in the supply chain, and dragging down prices for LED chips and lamps. Kaufman reports that LED chip prices are down 20% to 30% over the past four months alone.
But according to the analyst, this is just temporary. If you look farther out, Kaufman argues that "pricing declines for LED chips should drive demand elasticity."
Translation, please?
Translated into English, Kaufman says that by producing more LEDs than people want to buy, companies such as Cree (Nasdaq: CREE ) , Philips (NYSE: PHG ) , and SemiLEDs have accidentally lowered the cost of LEDs. But now that LEDs are cheaper, more people will want to buy them -- which will increase demand, causing more companies to manufacture them, and importantly, causing more companies to buy LED manufacturing equipment from Aixtron (and presumably, its archrival Veeco Instruments (Nasdaq: VECO ) ) to meet the demand.
Accordingly, Kaufman does not believe SemiLEDS' news is bad for Aixtron. To the contrary, Kaufman argues that Aixtron "continues to generate new orders and is likely to reaffirm its full-year guidance." Kaufman is betting that "the Street's expectations ... for a significant drop off in shipments and revenues" at Aixtron are wrong -- and urging investors to buy the stock.
Let's go to the tape
Unfortunately, Kaufman's more often been wrong than right about its semiconductor picks. According to our CAPS records, only about 44% of Kaufman's semi recommendations move the way the analyst says they will. While it's true Kaufman has been right with its advice on companies such as Cree and Aixtron, it's also been wrong about Veeco and LED industry supplier Rubicon Tech (Nasdaq: RBCN ) .
|
Company
|
Kaufman Rating
|
CAPS Rating
(out of 5)
|
Kaufman's Picks Beating S&P by
|
| Cree |
Underperform |
*** |
91 points (picked twice) |
| Aixtron |
Outperform |
*** |
29 points |
| Veeco |
Outperform |
*** |
(4 points ) |
| Rubicon |
Outperform |
** |
(46 points) |
Worse yet, Kaufman doesn't just have to be right about Aixtron -- it has to be blow-out-the-box right in order to make Aixtron anything near buyable.
Aixtron: Buy these numbers?
According to most of the analysts at whom Kaufman scoffs, investors can expect no more than 1.7% annual earnings growth from Aixtron over the next five years. With the company now selling for 9.6 times earnings, these other analysts' guesses would have to staggeringly wrong to make Aixtron a bargain at today's price.
The news gets worse. Like so many other companies operating in the LED industry, including Veeco, Cree, SemiLEDS, and Rubicon, Aixtron currently generates far less profit from its business than it claims to have earned on its income statement. Over the past 12 months, net profit has surged to $302 million at the company -- but actual free cash flow looks more like $61 million. Therefore, Aixtron arguably trades for 47 times free cash flow. And again, everyone except Kaufman expects it to grow at less than 2% per year over the next five years.
Foolish takeaway
Is Kaufman right that LEDs' prospects are brighter than many folks believe? It's entirely possible. There's a reason General Electric (NYSE: GE ) is gunning for growth in LED lighting lately, and hitching up with Cree to help it produce more of the things. I'm betting GE doesn't expect to lose money on the venture.
Still, Kaufman may not be right enough about Aixtron to pay 47 times free cash flow for the stock. I personally think that's a bit of a stretch -- but feel free to disagree. If you think Aixtron is worth the money, click over to Motley Fool CAPS right now and tell us why.
Then add Aixtron to you Fool Watchlist, and find out whether you're right.
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