Stephens: We're Buyers Of Cree, See Stock Nearly Doubling

• Cree, Inc. CREE shares are down 10 percent since December 21.
• Stephens’ Harsh Kumar maintained an Overweight rating for the company, with a price target of $40.
• The company appears poised for growth in commercial lighting, while trends in the LED chip business seem stable, Kumar stated.

“We are buyers of CREE as we believe the company is set for growth in the commercial lighting business while at the same time it is seeing stable trends in the LED chip business,” analyst Harsh Kumar wrote. He added that Cree has been able to control its operating expenses, which would enable the company to enjoy operating leverage.

For the December quarter, Cree reported EPS of $0.30 and revenues of $435.8 million, versus Street expectations of $0.24 and $438.8 million. Gross margin came in-line with estimate, at 31.7 percent. “The company’s commentary calls for stabilization in the LED business and growth in lighting business during the second half of fiscal 2016 ended June,” Harsh noted.

Cree was able to curb operating expenses at $102.8 million, versus the Stephens estimate of $106 million. The company guided to EPS of $0.25 and revenue midpoint at $415 million, for the March quarter. Gross margin is expected to remain flattish at 31.7%. Operating expenses are expected to be cut to $100 million, versus the Stephens estimate of $107.5 million.

“Each million dollars reduction in Opex relates to roughly a penny in EPS growth,” Harsh commented. The estimates for fiscal 2016 and fiscal 2017 have been revised from $1.00 on $1.752 billion to $1.07 on $1.722 billion and from $1.42 on $1.942 billion to $1.46 on $1.923 billion, respectively. The upward revision in earnings mainly reflects greater operating leverage as well as lower taxes.