2014-08-14

Taking Stock of Cree

Cree announced that sales rose 16.3% and earnings rose 6% from a year earlier. Of course, the stock tanked, dropping 10% overnight.

Cree's stock has made a habit of sinking after each quarter's earnings are announced. That's because, as solid as the business might be, Wall Street sets its expectations based on guidance issued by Cree. And the company has managed to disappoint investors each time on some combination of revenue, earnings, profit margins, or future expected earnings.

You can see a quarterly pattern developing over the past year. Cree's recent 10% stock drop is barely visible at the right side of this graph.
(Source: Yahoo Finance)

This quarter, both future expectations and revenue disappointed. (Earnings per share came in above estimates.) Cree pulled in $436.3 million in the quarter, but analysts had settled on a $444.1 million consensus. For the next quarter, the company issued guidance of $440 million to $465 million, but the Street had expected $470 million.

One fact investors didn't like in Cree's announcement of quarterly and full fiscal-year earnings: Lamp and luminaire sales rose 56% -- doing too well relative to LED sales, which carry a higher profit margin. Component sales dropped by small amounts in each of the previous three quarters; full-year sales dropped 8.8% from $217 million in fiscal 2013 to $199.5 million in fiscal 2014.

"I think a lot of their traditional [component] business in China is probably... going to Chinese or native players," Raymond James analyst Hans Mosesmann told Reuters.

Downgrade
At least three analyst firms have issued downbeat assessments of Cree. Canaccord Genuity maintained its buy rating but lowered its price target to $64. Summit dropped its rating from buy to hold with a $40 target. Susquenhana (subscription required) maintained a neutral rating but dropped its target from $50 to $42. Specifically, Susquehanna cited weakness in the midpower subsegment in Cree's component line:

The company's component business unit suffers from lack of exposure to the midpower segment, which is growing much faster than other subsegments. Cree continues to depend on the continued strength from its Lighting business while it is unable to add any midpower component manufacturing capacity, two factors that in our opinion drive a lower stock valuation multiple.

Who can win?
With Osram struggling, Philips spinning off its component and automotive divisions, both companies shedding legacy lighting businesses, and Cree unable to satisfy investors, who has what it takes to grow and thrive in this market?

My guess is that the weakness at the top of the SSL business provides a long-term opening for Chinese suppliers to step in and grow even more rapidly. What do you think?

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— Keith Dawson , Editor-in-Chief, All LED Lighting