Cree: What Does The LED Business Restructuring Mean For The Company ?

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Cree

Leading LED manufacturer Cree (NASDAQ:CREE) recently announced restructuring of its LED business and a new stock buyback plan. Cree said it will restructure its LED products business to reduce excess capacity and overhead, so as  to improve the cost structure moving forward.  This is in response to recent LED market trends leading to higher price erosion than expected. The company also lowered its revenue forecast for the fourth quarter and said it would buy back $500 million worth of stock for the next fiscal year. The company said it now expects revenue of $375 million for Q4 2015, down from the $420 million-$440 million it guided earlier. Since the announcement, Cree’s shares were down $1.81 or 5.92% at $28.75 in after-hours trade on the Nasdaq. (Read Press Release)

A general shift to LED lighting in the lighting market is expected to be the primary growth driver for the LED industry, as demand from the backlight market nears saturation. LED lighting market is anticipated to grow 45% per year through 2019, driven by the declining price points and the rising interest on the part of the channel in pushing LED products to consumers. LED lighting is expected to account for 80% of the entire lighting market by 2020, creating a market that will be as big as $94 billion. [1]

Cree is confident that it is well positioned to continue to win in LED lighting. Though the company has made significant progress growing both the volume and product base of its lighting business over the last several years, it believes that there is still a lot of untapped potential in terms of both revenue and profitability. Cree claims that it continues to gain share in the commercial lighting market as the demand rebounded in late March. The company has a strong product pipeline and is building good sales momentum for  its products.

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Cree is increasing LED reserves to reflect the more aggressive pricing environment experienced in the current quarter, and to factor in a more conservative pricing outlook for fiscal year 2016. The restructuring charges are targeted to be approximately $85 million. Cree’s strengths can be seen in multiple areas, such as its revenue growth (which has slightly outpaced the industry average of 0.7%), its good cash flow from operations, and its largely solid financial position with reasonable debt levels by most measures.   (CREE’s debt-to-equity ratio is very low at 0.06 and is currently below that of the industry average.)  However, as a counter to these strengths, we also find weaknesses including a generally disappointing performance in the stock itself, deteriorating net income and disappointing return on equity.

Though the LED landscape remains highly competitive, Cree believes that its high power LED technology positions the company for long-term success in high performance LED lighting applications. The collaboration with Lextar can help Cree expand its presence in the mid-power segment.

By quickly tweaking various components, Cree could well achieve breakthroughs on the bulbs’ cost and performance that its competitors can not. Cree has staked its entire research and development efforts on the ascent of the LEDs as well as LED lighting. In the coming decade, as the consumer market – along with the much larger industrial and commercial lighting markets – transitions from fluorescent and incandescent lights to LEDs, Cree sees vast potential for growth.

Our price estimate of $35 for Cree is at a premium of about 15% to the current market price.

See Our Complete Analysis for Cree Here

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Notes:
  1. Why Investing In Cree Looks Like A Bad Idea, Seeking Alpha, December 3rd, 2015 []