Cree Dims Its Prospects

by: Mike Maher

Shares of Cree (NASDAQ:CREE), which makes LED lights, are down 11% today after lowering its revenue targets for Q3. With shares touching new 52-week lows, will Cree bounce or continue to drop lower?

Cree last reported earnings on January 18. For the second quarter of 2011, Cree reported revenues of $257 million, up 29% year over year but down 4% from Q1. EPS on a GAAP basis was $0.45, or $49.8 million, up 47% YoY. Both numbers missed targets, as management cited an "inventory correction" in Asia as the reason for lower sales. Gross margins were 47.1%, down slightly YoY but still very strong. Guidance for the third quarter was for revenue of $245-265 million, with gross margins coming in around 46%. Shares plunged that day, falling from above $62 to $53.63, and after a slight rebound in February, have been drifting lower till today.

Cree announced that for the quarter ending March 27, revenue would be in the $215-220 range, nearly 15% below the previous guidance of $245-265. Gross margin estimates were also cut, dropping to 43% from the 46% given just two months earlier. Cree said that it was taking customers longer to work through inventories than it had previously anticipated, and this has added to downward pressure on pricing. Cree is forecasting revenue growth in Q4 to be in the 10%-12% range. Shares are currently down $5.67 to $43.32, which is an 11.6% drop.

Given Cree's comments, it is hard to find anything to like about the stock. Revenues are contracting and prices are coming down -- hardly signs of a strong business. This is pressuring gross margins and hurting the profitability of the company. The company does say that LED component demand is improving in Asia, although I am having trouble linking that statement to the lower sales and prices the firm is also seeing.

Given the slowing sales and margin compression, I would not be buying shares here. While the stock may bounce a few percent after the announcement today, that would be an opportunity to sell shares. Declining sales and compressing margins will drive this once high-flier lower, as well as pressuring shares of competitors Veeco Instruments (NASDAQ:VECO), Rubicon Tech (NASDAQ:RBCN), and Aixtron (NASDAQ:AIXG), all of which are lower today. Cree's future looks less bright today, making the stock an interesting short going forward.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.