Cree’s Outlook Remains Positive Despite Slow Growth In Q1

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CREE
Cree

Cree (NASDAQ:CREE), one of the leading global LED manufacturers, will reports its Q1 2014 earnings on October 22. Backed by strong demand across its business segments – LEDs, Lighting & Power and RF – the company witnessed 19% growth in its fiscal 2013 revenue and reported a 2.6% increase in gross margins. However, despite retaining its growth momentum in Q4 2013, Cree’s stock price declined significantly after the earnings release as it anticipated lower growth in Q1 2014.

We believe that the slowdown was more on account of seasonal factors and that Cree’s long-term prospects remain intact. LEDs offer energy savings of 50%-60%, leading to lower greenhouse gas emissions and a much higher lifespan compared to conventional technologies. With rapid innovation in the industry, LED manufacturers are aiming to narrow the LED price gap with incandescent lighting, which eventually will accelerate LED adoption in the future.

Cree is one of the leading players committed to driving global LED adoption and closing down the gap with conventional lighting through innovation. In the long run, the company aims to drive mass LED adoption and achieve 100% upgrade to LED lighting by its customers. Closing fiscal 2013 with more than $1 billion in cash and no debt, it has a strong balance sheet which gives it the ability to invest in growing its business and respond to new market opportunities.

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See Our Complete Analysis for Cree Here

New Product Innovations To Drive Demand For Cree

The general lighting market is expected to be the primary growth factor in the LED industry as demand from the backlight market nears saturation. LED lighting accounts for 15%-20% of the global lighting market at present and the LED market share is expected to rise at a rapid pace in the next decade. [1] Cree believes that it is still in a nascent stage of transition in LED lighting and thus the segment offers a tremendous growth opportunity.

Cree has a fully integrated vertical lighting model and is the market leader in both LEDs and LED lighting products. Product innovation in the last few quarters has opened new applications and improved LED payback, in turn driving demand for its products. It hit a milestone in driving LED adoption earlier this year by launching a LED bulb for as low as $10. Cree’s new LED bulb consumes 84% less energy and provides similar levels of brightness compared to traditional bulbs. It claims that its LED bulb is the biggest announcement in the lighting industry in the last few years, and will go a long way in accelerating LED adoption. There are around 5 billion light bulbs currently being used in U.S. homes alone that can be converted to LEDs. [2]

Earlier this month, the Cree LED bulb earned the ENERGY STAR label which means these bulbs now qualify for incentive rebates through certain local utilities. With the rebate the Cree LED bulbs will be available for under $5. (Read: Barrier-Breaking $10 Cree LED Bulb Now Even More Affordable With Utility Rebates)

Last month, Cree became the first company to comply with the recent voluntary standard set by California regulators to make bulbs more closely resemble the warm white light from traditional incandescents. The company launched a new LED bulb, the TrueWhite series, which comes close to the quality of light from a 60-watt incandescent. Available in the range of $18-$20, the Cree LED bulb has a color rendering index (CRI) of 93 and a score of 100 is the closest to natural light that a bulb can get. The True Light bulb uses 78% less energy and lasts 25 times longer compared to traditional incandescent light bulbs.

We estimate Cree’s LED market share to cross 12% over our review period.

Higher LED Adoption & Operational Efficiency To Improve Gross Margins

Despite a very competitive market environment, Cree’s gross margins in 2013 improved due to better factory utilization on account of rising LED demand, process improvements and new lower-cost product designs. However, Cree continues to make incremental R&D investment each quarter and incur higher operating expenses which can put pressure on margins in the future. 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 however shrink its bottom-line. Also, the pricing pressure in LED chips and components restrict growth in margins.

However, we expect Cree’s marketing expense to decline in the future. The full quarter benefit of LED bulb cost reductions implemented during Q4 2012 and increasing shift in product mix towards higher-margin LED fixture sales will lift margins. Additionally, the company claims that the gross margins earned on LED bulbs is improving. Higher LED volumes and lower cost from new product designs can help improve gross margins in the future.

We will update our price estimate of $63 for Cree after the Q1 2014 earnings release.

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Notes:
  1. Can LEDs Brighten Investor Portfolios?, Investopedia, August 29, 2013 []
  2. Cree Management Discusses Q4 2013 Results – Earnings Call Transcript, Seeking Alpha, August 13, 2013 []