By Adil Yousuf
Shares of Cree, Inc. (CREE), a leading LED (Light-emitting diode) manufacturer, have been on a stellar uptrend since March 5, 2013, after the company launched a line of low-cost LED bulbs to be sold at Home Depot (HD)1. The news was met enthusiastically on Wall Street. Cree's stock price rose 14% to $51.16 when the announcement was made. Shares continued to rise over the next few weeks, setting a two-year high of 59.98 on May 6, 2013.
Cree officials have been lauding the new bulbs, referring to the products as "game-changing" and "the biggest thing since the light bulb." This has surely helped the stock gain a lot of positive momentum. Additionally, Cree's recent quarterly earnings have solidly supported the stock's rapid ascend.
Cree posted fiscal Q3 earnings of 34 cents a share, up 70% from the prior year and in line with analyst estimates. Sales gained 23% to $348.9 million, above estimates. Moreover, LED lighting sales expanded by 51% for the quarter.
Strong growth in lighting products and reduced prices led to higher LED adoption despite the slow macro environment. Cree claims that the LED market dynamics are improving as manufacturers focus on driving global LED adoption and cut excess manufacturing capacity. Improving factory utilization, process improvements, and new lower-cost product designs increased Cree's gross margin to 38.1%, compared to 34.9% in Q3 2012. Additionally, a strong execution and focused capital spending increased the firm's cash by more than $50 million in the quarter.
Market IQ characterizes Cree as a high Quality stock (see below). Robust revenue growth, growth in net income, and no debt on the company's balance sheet warrant a high Quality number.
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Powered by its strong earnings growth and other important driving factors, Cree has surged by 67.5% in 2013, outperforming the rise in the S&P 500 Index during the same period. The stock's sharp appreciation has driven it to a price level which is now relatively expensive compared to the rest of the industry — Price to Cash flow multiple of 30 and a Price to Forecasted EPS of 50 compare less favourably to the industry average of 16.08 and 27.81 respectively.
Cree remains committed to driving LED adoption and closing down the gap with conventional lighting through innovation and price reduction. With improving LED market dynamics, Cree's top line will continue to increase at a good pace for years to come. Moreover, expansion in high population countries like China will help accelerate growth for the company.
According to a recent report 2, China aims for LEDs to achieve 30% market share of its general lighting market by 2015. While China already accounts for a big chunk of Cree's sales — 32% as of fiscal 2012, the company looks to increase its revenue in coming years as it widens its manufacturing operation in the country. Additionally, the company is looking to drum up more business in other growing markets, including North America and Europe 3.
Going forward, Cree has provided positive guidance for Q4 2013 — The Company expects double digit growth in lighting and single digit growth in LEDs. Cree continues to make incremental R&D investment each quarter and anticipates higher operating expenses in Q4 to support its media campaign, seasonal trade shows, and sales expenses. As adverse macro conditions subside and demand further picks up, Cree is expected to further increase its global market share 4.
1Cree launched a line of low-cost LED bulbs to be sold at Home Depot (HD). One retails for less than $10 vs. the $20 price tag that some of the less expensive models sell for. Retail prices for the new bulbs will be $9.97 for the warm white 40-watt replacement, $12.97 for the 60-watt warm white replacement and $13.97 for the 60-watt day light.
2The report was published by independent researcher Trefis.
3The North American LED lamp market is expected to grow from $3.6 billion in 2010 to more than $11 billion in 2015. Cree expects that its lighting segment will grow from $1.5 billion to $8 billion by 2015.
4Cree currently has 8% share of the global LED market. This is expected to increase as the firm continues to expand globally.
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