Cree Has 'More Challenges' Ahead, Says Needham

In a report issued Thursday, Needham analysts Y. Edwin Mok and Kimberly Donovan reiterated a Hold rating on Cree, Inc. CREE, while lowering their EPS estimates for fiscal 2015 and fiscal 2016 on the back of the management’s revised guidance.

Investment Highlights

Cree recently lowered its guidance for the fourth quarter of 2015, to be reported on August 11, and now expects sales close to $375 million, down 8 percent quarter-over-quarter. Management also announced a restructuring of its LED business, introduced a new $500 million stock buyback program and shared its fiscal 2016 operating plan.

The near-term weakness can be largely attributed to feeble LED pricing, “resulting in a big one-time revenue reserve,” the analysts explained, adding that, while they are encouraged by Cree’s initiatives to streamline its operations of the LED component business, they believe the sustained challenges the business faces will keep growth away for some time still.

Moreover, “the increased pricing pressure on consumer bulb” and a greater than expected seasonal decline in consumer bulb demand are overshadowing the advances made in commercial lighting. Management has indicated that the latter segment grew 10 percent (quarter-over-quarter) over the fourth quarter, while the former fell 25 percent. Now, “given the limited differentiation of the consumer bulbs, expect the business to further decline even with Cree's plan to focus on the high end.”

Overall, the ongoing uncertainty on Cree’s growth trajectory is keeping Needham on the sidelines. The firm now expects earnings of $0.85 per share on sales of $1.625 billion for fiscal 2015 (down from a respective $1.06 per share and $1.682 billion), and earnings of $1.23 per share on sales of $1.77 billion for fiscal 2016 (down from a respective $1.35 per share and $1.82 billion).