How Would Cree's Collaboration With Lextar Impact The Stock?

Sep. 4.14 | About: Cree, Inc. (CREE)

Summary

Lextar has managed to build a very strong position in the market for mid-power LED backlighting.

LED lights currently represent 15%-20% of the global market for lighting. It is believed that this market share will expand very quickly over the next decade.

According to Cree, it is expected that LED bulbs and LED fixtures will be the main source of growth in the segment.

Durham-based LED manufacturer Cree (NASDAQ:CREE) announced its collaboration with Lextar Electronics Corp, a Taiwanese company. Cree is set to invest $83 million in the company to purchase 83 million shares. Cree will then own a 13% stake in Lextar Electronics Corp once the deal passes through. Based on the collaboration between the two companies, there will be a mutual agreement regarding the supply of sapphire-based LED chips.

Cree as a company offers its customers outstanding performance in the lighting and high power LED component market. Lextar has managed to build a very strong position in the market for mid-power LED backlighting. Cree believes that the collaboration with Lextar will help the company achieve sustained growth in the market for LED lightning.

Both Companies Are In the Limelight

The collaboration has been agreed upon by company's board of directors. When talking about the agreement, CEO and Chairman of Lextar said,

"We are very excited about this new cooperation with Cree. We strongly believe this new collaboration will increase the competitiveness of our products and technology, enabling both companies continued growth in the LED lighting market. Furthermore, the cross license of LED chip and component intellectual property will afford both Cree and Lextar the benefits from our product and technology development, thereby strengthening our mutual competitiveness in the global LED industry."

Cree Chairman and CEO, Chuck Swoboda said that the company was excited about the strengthening of the relationship with Lextar that will lead to growth in LEDs and lighting. He believes that by working with Lextar, Cree will be able to focus its resources on high-performance and high-power LED chips that will differentiate Cree LEDs in the market. He added that with the help of this approach, Cree will have the financial and operational flexibility that it needs to achieve the best return on the capital invested and on their people.

Cree currently has a cash holding of $1.2 billion. The growth momentum of the company and its strong balance sheet position is one of the reasons that the company finds it easier to respond to emerging opportunities in the market.

The LED Market

LED lights currently represent 15%-20% of the global market for lighting. It is believed that this market share will expand very quickly over the next decade. For the LED industry itself also, LED lighting seems to be the main driving force as the backlight market nears its saturation point.

According to Cree, it is expected that LED bulbs and LED fixtures will be the main source of growth in the segment. The company has plans of building some very high volume products that will provide the company with the chance to use its internal facto to incorporate new product ramps. This will also help in reducing the time it takes for new technology to be introduced into the market.

The Current Position of Cree

Cree stocks had experienced a dip in its prices around the 12th of August due to the results announcements that were below analyst expectations. Analysts' consensus was for revenues up to $445 million and earnings of about $0.41 per share. The company had reported revenues of $436.3 million in its recent quarter. Earnings per share were $0.42.

For the current quarter, the company has announced that it expects to collect revenues between $440 million and $465 million and expects an EPS of $0.40 to $0.45. Analyst consensus is revenues of $465 million and EPS of $0.45.

Shareholders fear that the company could announce lower results by the end of the quarter as well and are reacting.

In addition to this, the company has also entered into an agreement for an unsecured, revealing credit line worth $150 million that can be used by the company to borrow, repay and re-borrow loans, conduct acquisitions and for working capital purposes as well.

Conclusion

Having announced revenues below analyst expectations and causing a panic among investors, this new collaboration with Lextar might come as a sign of hope to many as they expect the company to secure higher revenues after becoming a strategic customer of Lextar. The increase in market share, and the additional flexibility that this agreement will allow Cree, could help translate these gains into higher revenues and margins eventually. Based on this, the stock is bound to experience a positive impact as a result of this collaboration, since it will allow the company to attain continuous growth.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.