Sunday, April 17, 2011

Cree Inc. (NASDAQ: CREE): Q3 Earnings Preview 2011

Cree Inc. (NASDAQ: CREE) is scheduled to release its fiscal third-quarter earnings after the closing bell on Tuesday, April 19, 2011. Analysts, on average, expect the company to report earnings of 29 cents per share on revenue of $217.43 million. In the year ago quarter, the company reported earnings of 47 cents per share on revenue of $234.08 million.

Cree, Inc. develops and manufactures light emitting diode (LED) products, which include LED chips used in video screens, gaming displays, function indicator lights, and automotive backlighting. The company's silicon carbide and gallium nitride wafers are used in making LEDs, RF and microwave devices, and power devices.

In the preceding fiscal second-quarter, the Durham, North Carolina-based company's net income was $49.8 million, or 45 cents a share, compared to $33.8 million, or 32 cents a share, in the prior-year quarter. On an adjusted basis, the company earned 55 cents per share in the latest quarter. Revenue grew 29% to $257 million from $199.5 million. Analysts, on average, expected the company to report earnings of 58 cents per share on revenue of $276.59 million.

At its last earnings call in October, the company said that it expects adjusted second-quarter earnings of 56 cents to 60 cents a share on revenue of $270 million to $280 million. Non-GAAP net income is targeted to be $61 million to $65 million. Based on an estimated 110.1 million diluted shares outstanding, its GAAP EPS target is is 46 cents to 50 cents per share. GAAP net income for Q2 is targeted at $51 million to $55 million. GAAP net income for Q2 is targeted at $51 million to $55 million. GAAP and non-GAAP gross margins are targeted to be 48% plus or minus. 

The LED industry continues to benefit from rising demand for LED backlighting for TV and growing LED adoption for general lighting. LEDs use far less electricity than traditional incandescent bulbs, saving money in the long run on both bulbs and utility bills. According to Cree, LEDs use 10% to 15% of the power of an incandescent, and about half the power of fluorescent bulbs.  Cree LED lights last as long as 50,000 hours, or 50 times longer than an incandescent light and five times longer than a fluorescent bulb. Unlike conventional fluorescent bulbs, LEDs do not contain toxic mercury. The regulatory framework in the U.S. means that incandescent bulbs will be banned in phases, starting with the 100w bulb in 2012 and ending with the last 40w bulb in 2014. With incandescent bulbs being phased out, there is plenty of room for growth for LEDs. 

However, there are major risks here that investors need to consider. The LED industry is characterized by commoditization, intense competition and lower barriers to entry. Emerging markets are expected to play a critical role going forward as established markets are becoming saturated. Competition is fierce in emerging markets, however, making it challenging for investors to differentiate industry leaders from laggards. 

Last month, the company lowered revenue targets for the third quarter to a range of $215 million to $220 million primarily due to lower sales of LED chips and LED components. Earlier, revenues for the quarter were anticipated in the range of $245 million to $265 million. The company noted that LED component demand is improving post-Chinese New Year, yet revenue is lower than originally targeted. The LED chip business is also weaker than targeted due to more aggressive pricing and weaker demand. Gross margin for the quarter is expected to be approximately 43%. The decline in gross margin targets is attributable primarily to increased pricing pressure in the LED chip product line. The company expects adjusted net income to be in the range of $62 million to $65 million, or 56 cents to 59 cents a share. Chuck Swoboda, Cree's CEO and chairman, said, "Despite the challenges we faced in Q3, distributor sell-through has improved and we target solid growth next quarter. Based on our preliminary outlook for Q4, we are currently targeting revenue to increase 10 to 12 percent in fiscal Q4 led by growth in LED components."

The company's stock currently trades at a forward P/E (fye Jun 27, 2012) of 20.53 and PEG ratio (5 yr expected) of 1.03. In terms of stock performance, Cree shares have lost nearly 49% over the past year.

Full Disclosure: None.
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