Cree (CREE, Financial) is keen on improving its operating margin, accelerating revenue growth and added operating leverage through the business. The Power, Lighting and RF product offerings are expanding, but this growth is offset by the declining LED products sales.
Cree minimized operating expenses in first quarter, but remains focused on accelerating investment in R&D, marketing and sales for allowing long-term growth.
Cree has developed an incredible IP portfolio since the past 27 years. Cree’s short-term investment in legal cost is expected to help future revenue and earnings growth combined with improved LED licensing income and higher LED product margin.
Some weaknesses
Cree has witnessed a decline in the facility utilization, which is decreasing the margins, but enhancing its ability to cater better to the customer needs. The poor LED visibility has added variability to the current quarter forecast.
Cree reported about 12% decline in LED sales owing to a weaker demand and lowering of channel inventory, and RF and Power in the comparable range.
Cree is believed to be growing significantly with continuous share repurchases in the first quarter and aims for greater repurchases during the second quarter.
Cree’s strong balance sheet gives it the opportunity and flexibility to repurchase shares and make significant investments for growing the business and expanding operating margin with time.
These are some strong initiatives taken by the company that will push its long term growth. However, it is facing some headwinds, which could weigh on its performance in the near term. During the quarter the solid performance of Lighting, Power and RF products was offset by the declining sales of LED products. In spite of this, the company is optimistic about its LED performance in the future; as consumers become aware of its benefit they might switch to this new technology.
Conclusion
Going forward, Cree expects its current quarter revenue to be in the range of $400 million to $420 million, while It will also pass on the benefits of a strong balance sheet to its shareholders with buyback program. Although the stock sunk to its 52-week low yet the prospects seems to be good. It has an impressive forward P/E of 22.8 compared to a trailing P/E of 40.22. Therefore investors must watch this stock closely for any signs of turnaround for its ailing LED business, which will drive its growth in the long run.
