Why Cree Deserves Another Look

May. 1.12 | About: Cree, Inc. (CREE)

The natural gas and solar energy sectors have nothing to do with Cree (NASDAQ:CREE), but the tug of war dynamics stemming from those other sectors offer insight to how Cree will trade over the next few months. Take First Solar (NASDAQ:FSLR) as an example of the parallel challenge of surviving in an industry facing excess supply. Like Cree, First Solar operating in an environment where average selling prices (or ASP) of the product are dropping. The pricing pressure from ASP for Cree is not as severe, since Cree has multiple product lines. Cree is also looking at lower price points to drive the adoption of LED, opening new market opportunities.

Is Cree a company to buy, when there are other companies, like Universal Display (NASDAQ:PANL), offering bigger price moves? Universal Display develops organic LED for the display and lighting industry. The company reports earnings on May 9 after market close.

Earnings Summary: During Cree's Q3 earnings report, the company noted the following financial highlights:

  • Revenue of $285 million
  • GAAP net income was $9.5 million. GAAP diluted earnings per share of $0.08
  • Non-GAAP net income of $23 million ($0.20 per diluted share)
  • $9 million decrease in lighting sales
  • $13 million decline in LED sales
  • Non-GAAP gross margin of 35.6%
  • $710 million cash, cash from operations of $48 million

There are a number of reasons investors should be concerned with Cree.

Positives:

1. Cree might start to see sales momentum starting this quarter. The company will be showcasing its products at 3 major trade shows this quarter: Light+Building in Frankfurt, Germany; Lightfair in Las Vegas and Lightfair in Guangzhou, China. Its new XSP Series LED streetlights is the company's first outdoor product to integrate from the LED chip to the lighting system. Educating the customer for this new product will take time. If successful, the product is positioned to compete well with the cost of regularly replacing ordinary bulbs

2. The company also anticipates solid growth in the current Q4, supported by improving order rates in March

3. Sales expected to resume post-Chinese New Year

Negatives:

1. Cree saw inventory to 96 days, up from 85 days at the end of December. This is due to anticipation of new product launches in the current quarter. DSO, or Days Sales Outstanding, rose to 53 days, up from 46 days.

2. Cree is still digesting its Ruud acquisition. Investors who hoped its integration would not hurt its sales pipeline will need more patience.

3. The training and addition of new agents will hurt earnings in the short term, but will help grow revenues in the long term. Up to 80% of the agents are new to either the BetaLED line or the Cree line. Fewer than 20% of the Cree agents were familiar with both the indoor and outdoor line, which would explain the disruption experience in the last quarter.

Outlook and Forecast:

  • Q4 revenue to be in a range of $295 million to $315 million
  • Forecast comprises of double-digit growth in lighting and is based on current backlog forecast
  • Q4 GAAP: $5 million - 12 million, or $0.04 - $0.10 EPS
  • Non-GAAP $23 million to $30 million, or $0.20-0.26

As a footnote, non-GAAP excludes amortization of intangibles, stock-based compensation expense and the related tax effect and onetime tax adjustments.

Veeco Instrument's (NASDAQ:VECO) earnings, which beat consensus, were hurt by weak bookings. The company provided a revenue forecast in the range of $120 million to $145 million, above the consensus forecast. For Cree, this suggests that investors will be rewarded in the long term, if they are willing to wait for the company to transition its sales force.

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