Cree’s Earnings Will Show Continued Growth Momentum

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CREE: Cree logo
CREE
Cree

Quick Take

  • Cree will announce its Q4 2013 and year end results on August 13, and we expect the company to witness another quarter of strong growth.
  • With widespread awareness about the economic and environmental benefits of LEDs, its global adoption is bound to increase in the future. The general lighting market is expected to be the primary growth factor.
  • As per LED Inside, the LED lighting segment is estimated to increase from around $1.5 billion in 2012 to approximately $8 billion by 2015, a CAGR of over 70%.
  • LED lighting products currently account for 35% of Cree’s total revenue, a substantial increase from 19% a year ago. Cree is the market leader in both LEDs and LED lighting products.
  • Available for as low as $10, Cree’s low cost bulb will help promote LED usage as it consumes 84% less energy and provide similar levels of brightness compared to traditional bulbs.
  • Despite intense competition and increasing shift in product mix towards lower margin LED fixtures, an expanding revenue base and improving factory utilization will help Cree improve its gross margins in the future.

Cree (NASDAQ:CREE), a leading LED manufacturer, will announce its Q4 2013 and year end results on August 13. Improving LED market dynamics and increasing LED adoption driven by the launch of new innovative products enabled the company to post a strong Q3 2013. Despite the slow macro environment Cree witnessed a 23% y-o-y increase in revenues last quarter. Additionally, the improving factory utilization, process improvements and new lower-cost product designs increased its gross margin to 38.1%, compared to 34.9% in Q3 2012.

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With a continuous improvement in the LED market dynamics, we believe Cree’s top line will continue to grow at a rapid pace for years to come. It has a solid balance sheet with strong cash position and no debt, which gives it the ability to continue investing in growing its business in the future as well. Cree’s product innovation has opened new applications and improved LED payback in turn driving demand for its products. In the long run, the company aims to drive mass LED adoption and achieve 100% upgrade to LED lighting by its customers.

We expect Cree to witness another quarter of strong growth in Q4 2013.

See Our Complete Analysis for Cree Here

Lighting To Accelerate LED Demand

With widespread awareness about the economic and environmental benefits of LEDs, its global adoption is bound to increase in the future. LEDs offer energy savings of 50%-60% leading to lower greenhouse gas emissions and a much higher lifespan compared to conventional technologies. LEDs offer a cost effective option to lower global electricity consumption, and as economies around the world aim for greater economic and social development, LED adoption is expected to increase in the future. The LED market has more than doubled in size in the last five years from $5 billion in 2006 to around $14 billion in 2012.

The general lighting market is expected to be the primary growth factor in the LED industry as the demand from the backlight market nears saturation. According to LED Inside, the LED lighting segment is estimated to increase from around $1.5 billion in 2012 to approximately $8 billion by 2015, a CAGR of over 70%. While LEDs currently account for only 10% of the total lighting market, the percentage contribution is estimated to increase to as high as 60% by 2020. [1]

Cree’s Low-Cost Bulbs Will Spur Demand

Cree has a fully integrated vertical lighting model and with the acquisition of Rudd’s portfolio in August 2011, it has became the market leader in both LEDs and LED lighting products. LED lighting products currently account for 35% of Cree’s total revenue, a substantial increase from 19% a year ago.

In Q3 2013, strong sales of commercial indoor fixtures and the launch of CREE LED bulb more than offset the seasonally lower outdoor lighting sales in the cold weather regions. Cree claims that its LED bulb is the biggest announcement in the lighting industry, in perhaps the last few years, and will go a long way in accelerating LED adoption. Available for as low as $10, its new LED bulbs consume 84% less energy and provide similar levels of brightness compared to traditional bulbs.

Cree intends to continue working on building new lighting systems to reduce the cost of LED lighting and improve payback. It made good progress in releasing several new fixtures in the last few months, including the performance upgrade to its LEDway Series and LED Streetlights.

Rising LED Demand & Operational Efficiency To Improve Gross Margins

Cree witnessed a significant decline in gross margins in 2011 due to decreasing LED selling prices and higher expenses. However, despite a very competitive market environment, gross margins in 2012 improved due to better factory utilization, process improvements and new lower-cost product designs. Improving LED demand led to higher factory volumes which in turn increased gross margins to over 38% in Q3 2013.

Cree continues to make incremental R&D investment each quarter and anticipates higher operating expenses in Q4 to support its media campaign, seasonal trade shows and sales expenses. In order to compete against other players, Cree will have to continuously invest in its R&D capability and incur higher marketing expenses which can shrink its bottom line. Also, an increasing shift in product mix towards lower margin LED fixtures, especially in emerging markets, and pricing pressure in LED chips and components restrict growth in margins.

However, we expect its marketing expense to decline in the future. Additionally, as adverse macro conditions subside and demand further picks up, we expect higher volumes to improve factory utilization in turn improving Cree’s margins over the years. (Read: Can Cree Sustain Its Gross Margins Growth?)

We will update our price estimate of $63.61 after the Q4 2013 earnings release.

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Notes:
  1. Lighting the Way: Perspective of the global lighting market, McKinsey Report []