Cree (NASDAQ:CREE), a leading manufacturer of LED chips, components and lighting products, is set to announce its Q3 results for 2012 on Tuesday, April 17th. Cree competes with other large LED manufacturers such as Nichia, OSRAM Opto Semiconductor, Toyoda Gosei (OTC US:TGOSY), and Epistar Corporation (LI:EPIS). Fiscal year 2011 saw an increase in Cree’s revenue but at the expense of declining profit margins. We believe that Q3 will not be much different from the previous quarters. Mentioned below are certain trends that will continue to impact the results in the coming quarters.
Widening Surplus & Lower Margins
An increase in LED surplus from a relatively low 7% in 2010 to 45% in 2011, has resulted in significant pricing pressure. As per IMS research, the surplus is predicted to widen further in 2012 resulting in reduced LED factory utilization levels .
Cree’s gross profit margin have witnessed a considerable decline to 35% in the last quarter from 47% an year ago. The increased LED supply by Chinese manufacturers and a shift in product mix towards lower margin fixtures has resulted in the ongoing pricing pressure in LED chips & components. The oversupply situation (which is likely to persist in the short term) puts a downward pressure on margins, which are expected to remain more or less around the current levels as per our estimate.
Slowdown in the Backlight Markets
As the TV market matures and the ASP’s decline, the growth in backlight markets slowed down in 2011. ASP were down as much as 45% in 2011 and is predicted to decrease further in 2012. With the backlight markets becoming saturated and the general lighting market yet to take off, the revenues from the LED packaging industry are expected to be flat in the next five years. The growth in revenue from the lighting sector will be largely offset by a decline in the backlighting sector .
Despite the current roadblocks, Cree seems to be making the best of the tough LED market. Cree’s LEDs score high on performance benchmarks like color consistency and high brightness across a wide viewing area. Its acquisition of Ruud Lighting, a leader in outdoor lighting, in mid-2011, allows Cree to extend its leadership position and increase the adoption of energy-efficient LED lighting. It also gives the company a broader presence in the lighting systems market and the expertise to develop next generation of industry-leading, lighting-class LED components. Increased investment in R&D and developing newer products to differentiate itself from other competitors will help Cree improve cost and performance to drive adoption.
We maintain a $26.36 price estimate for Cree, which is at a discount of 20% on the current market price.Notes:
- IMS Research Expects 2011 Packaged GaN LED Revenues to Decline 6% to $8 Billion on Weakness in Backlighting; LED Growth Expected from 2012 – 2015 as Lighting Accelerates, LED Market Research Press Release, January 17, 2012 [↩]
- LED market grew almost 10% in 2011, with 44% growth in lighting, LED Magazine Industry News, February 7, 2012 [↩]