LED maker Epistar Corporation (2448.TW) had a tough year in 2011; as television manufacturers increasingly seek to integrate their operations vertically and produce their own LED products, profit for margins on products like those produced by Epistar face competitive pressure. Analysts have pointed to this trend as one reason they have been revising their estimates for Epistar’s profitability downward. In spite of that growing bearishness on the part of analysts, the StarMine research team has identified Epistar as another Asian company it expects will report earnings that fall short of even these reduced estimates when it reports its earnings for 2011 on March 12, 2012.

The I/B/E/S consensus estimate for Epistar has fallen from over NT$8 to its current level at NT$1.45, but the SmartEstimate is even lower, at 1.34 New Taiwan dollars (NT$). That translates to a negative Predicted Surprise of 7.5%, and signals that more downward revisions likely lie ahead. The demands by TV manufacturers for lower-cost LED components — despite the higher costs of producing these increasingly complex items for next-generation televisions, worries analysts who follow Epistar. Channel checks by analysts suggest that Epistar may have turned away orders by buyers offering prices the company considered too low. Those lost orders may put downward pressure on earnings for 2011.

Although the semiconductor industry has been hit hard by the flooding in Thailand, that has not had a big impact on Epistar earnings; rather, its problems stem from its lack of pricing power and industry overcapacity, problems that will be more difficult to resolve than recovery from flood damage. Skye Chen of Samsung Securities is an analyst with a track record for accurate and timely estimates and has earned a 5-stary rating from StarMine; he has an estimate of NT$1.20, far below the consensus estimate. If the best analysts, such as Chen, continue to make accurate predictions, then we should be prepared for Epistar to report a profit that falls short of the consensus estimate when it reports earnings on March 12, 2012.

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