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After Falling 20% in 2014, Cree is Finally a Value Play

August 21, 2014 | About:
Iampat

Iampat

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Cree (CREE) has had a disappointing time in 2014, with the stock down around 20%. However, the company's results have been strong, and since it is sitting on a big opportunity in the form of LED lighting, it might be a good buy on the drop.

Terrific results

Cree's results have been strong. In its third quarter of fiscal 2014, it reported an increase in total revenue by 16% to $405 million, while net operating income was $47.7 million. The gross margin was 37.8% in the quarter, and operating profit increased 20% year-over-year to $53.6 million, all within the expected range. The third-quarter profit rose to $28.2 million from $22.2 million last year.

The expected fourth-quarter revenue is between $430 million and $460 million while the gross margin is estimated to be at 37.5%. The net income is targeted to be between $47 million and $55 million. All these figures indicate that Cree is seeing robust growth and can improve in the future.

The way ahead

Cree has established its name for delivering maximum efficiency in lighting systems with the first 200 lumen per watt LED concept luminaire, which delivers twice the efficiency of the best linear fluorescent luminaires. The company's self-programming, one-button SmartCast technology brings down energy consumption by 70%.

The company, with its ZR LED, is delivering excellent light quality in its products at a very low price of $100. Cree made the first LED component to overcome the 300 lumen per watt performance barrier by launching a 303 lumen per watt white high power LED. The new XLamp XB-H high-density LED component that delivers unparalleled lumen density and optical control, the new series of CXA high-density arrays that double the white output of existing CXA arrays, and the higher density 6000 and 8000 lumen versions of the LMH2 LED module family have completely replaced the old ceramic-metal-halide lamps. The company is also expanding its business with its XSP streetlight series, with the XSP Area and XSP W Wall Pack products introduced in the market.

The operating strategy of the company gives it the flexibility to make further investments, while still continuing to reduce the product prices. Cree is renowned for its innovation. Over the years, the company has launched numerous LED bulbs which were way more efficient and cheaper than the products of its peers and the company is continuing down that road.

Cree recently introduced a new parking LED called the OSQ™ Area LED luminaire and the company expects that it will replace 54 million high intensity discharge (HID) parking lights across the U.S.A. The company claims that these new LEDs will facilitate energy saving of up to 70% and will cost half as much as other HID parking lights. In addition, its lifetime of 100,000 hours is almost 100 times longer than that of an incandescent bulb.

This announcement comes just a few weeks after Cree announced the LED T8 replacement tubes. The company is confident that the T8 will compel commercial lighting users, which account for more than 40% of all lighting in the U.S., to switch to LED. According to Cree, there are roughly 2.3 billion fluorescent sockets in the United States and about 1.3 billion of them are T8 sockets.

The T8 will have a retail price of about $30 and will come with a five-year warranty. The T8 and T5 market is valued at nearly $4 billion, and Cree’s initiatives should prove to be fruitful.

Conclusion

Given Cree’s reputation of innovation, and the current beaten down price, I think shareholders should consider adding it to their portfolios. Moreover, the company has diversified its revenue streams and the introduction of new products should further boost its growth. Cree looks like a good buy to me.


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