One Analyst Sees A Bright Future For Cree

Cree CREE manufacturers high-brightness Light Emitting Diodes (LEDs) that are marketed exclusively through Home Depot.

Hendi Susanto of Gabelli & Company upgraded Cree from Hold to Buy on Thursday, the same day the company increased the value of its existing share buyback program to $300 million after accounting for $99.6 million in recent purchases.

The upgrade and buyback announcement couldn't have come at a better time as shares of Cree hit fresh 52-week lows of $44.60 on Wednesday. The stock has lost around 20 percent year-to-date, compared to a rise of around 20 percent in the Nasdaq Composite Index and its corresponding ETF, PowerShares QQQ QQQ.

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A Bright Future Ahead

Susanto explains that Cree has demonstrated solid double-digit year-over-year growth over the previous 10 consecutive quarters with the company's gross margins remaining steady. Cree's non-GAAP gross margin of 38.4 percent in fiscal 2013 is identical to the average gross margin of 38.4 percent the company has reported in the first nine-month period of fiscal 2014.

In the near-term, Susanto cautions on low visibility of market demand and supply balance with a possibility of negative cyclicality.

However, given Cree's market leadership, the company could benefit in the longer-term.

“We continue to believe in the long-term secular growth of LED lighting,” Susanto wrote in the Upgrade note on Thursday. The analyst did caution that the pace of the market adoption may come at the expense of lower pricing and lower margins.

Nevertheless, Susanto believes that over the longer-term, Cree has the necessary infrastructure in place to benefit from advancing its factory utilization when market demand rises.

Shares are Buy rated with a $61 price target.