Ahead of the Curve: Cree 08Q2 Earnings Review: LED Market Arriving?Font size: A | A | A8:26 AM ET 1/24/08 | Briefing.com
reported their fiscal 2008 Q2 results after the close on Tuesday, January 22, 2008. While some might view the results as positive because Cree beat earnings estimates, the more significant positive news is the statements made about the nature of the market for commercial LED lighting. It is this market, we believe, that will eventually be the driver for Cree products. We recommend continued holding for those investors following our investment premise for the company.
Exiting The Waiting Period
After it became clear in August of 2006 that Cree's presence in the handset LED marketplace had weakened substantially, we declared that Cree had entered a "Waiting Period."
The waiting period amounted to an unknown period of time before the market for commercialization of white LED products developed. While Cree itself would not be a vendor of application products in this market, they would be a vendor to other application companies.
Last quarter, we noted that the commercial market for LEDs might finally be showing some signs of developing. We stated in our review of 19-Oct-07 Cree FY08 Q1 Earnings Review the following:
Last quarter, however, the company made "hesitant and vague statements" about the commercial lighting market, causing the stock to decline sharply after the call. CREE fell from approximately the $27 level to below $23 in less than 10 days of trading.
This quarter, in contrast, however, the company made extremely positive and encouraging statements about the lighting marketplace.
This is the first time the company has made positive statements about the development of the market in anything other than vague terms about the potential in the future.
This quarter's results not only backed up those positive statements by the company, but showed even stronger signs of movement towards maturation.
The Emerging Market For LEDs
The good news for this quarter is the statements made in the conference call regarding the market for white LED commercial lighting. In addition, and unexpectedly, the video screen market also appears to be showing growth signs. Comments about the lighting screen market were somewhat muted in last quarter's conference call.
Some of the positive remarks made in the conference call included the following:
Commercial lighting and video screen lighting now make up more than 50% of revenue XLamp LED growth is targeted at double-digit growth rates Gross margins are in the 34-36% level for Q3, up from 30% in Q1 and 35% in Q2 Refuted a circulating argument that silicon-carbide substrates are a product disadvantage in the marketplace
In general, these are all continuations of trends that began last quarter. Statements about the notebook market this quarter were much stronger than those made last quarter, however, which is a pleasant surprise.
Some analysts today have reiterated Sell recommendations on the company. Those recommendations appear to be based on the perception that the handset marketplace is still the primary driver for Cree revenues.
If we agreed that handset LEDs were the primary driver of a Cree investment premise, we would strongly agree with a Sell recommendation. An investment in Cree today should be based on the idea that the commercial lighting marketplace is finally beginning to develop.
As with all premature markets, however, there is no guarantee that the market will actually develop. In addition, there is no guarantee that Cree will be a primary beneficiary of that market.
However, we believe that the current valuation of the company makes it an extremely attractive risk/reward proposition for the development of the commercial LED marketplace. The stock remained virtually flat with its valuation of three months ago, but the indications of an emerging market have strengthened.
In addition, Cree's intellectual property situation, which is strongly positioned by what is primarily a manufacturing process patent, makes the company a very solid investment prospect now. We will have more on Cree's intellectual property situation in an upcoming article.
Cree 08Q2 Results
The following table summarizes Cree's actual revenue and earnings for the quarter, compared to the consensus estimates in place prior to the report. Cree uses a June 30 fiscal year.
CREE Q2 FY2008 (12/31/2007) Actuals Estimate Consensus Range
Revenue, $M $119.0 $116.4 $108.8 to $119.0
EPS, including stock expense, $ $0.06 $0.06 $0.03 to $0.08
EPS, excluding stock expense, $ $0.13* $0.11 $0.08 to $0.12
Source: Reuters
Obviously, these are good results, however they are not the drivers for the stock today.
*The non-GAAP EPS number of $0.14 stated by Cree included a $0.01 per share one-time tax benefit. It is unclear whether this charge was included in the consensus analysis estimate of $0.11. We have listed the comparison of non-GAAP EPS as $0.13 against estimates of $0.11 to be on the conservative side.
However, in our opinion, the actual EPS results and revenue results are not the story of this quarter. The positive reinforcement of the idea that the commercial lighting market is beginning to emerge is the principal take-away from this quarter's results.
Conclusion
In the Ahead of the Curve column of 11-Aug-06 "Cree 06Q4 Review - Cree Enters Waiting Period" we stated that "it takes a very patient investor to stay invested in a company in this type of situation."
However, investors who either opened new positions at that time, at $18, or continued to hold existing positions, have now been rewarded for that patience. With the stock at the $28 level, the past 18 months represent a return of approximately 55%.
Ironically, we view today's $28 level as much more appealing for investors wishing to open new positions than we would have three months ago. The price is at the same level, but there are much stronger indications that the long-awaited market might actually eventually arrive.
As patient long term investors, we continue to recommend that other investors following our four-year-old premise continue to hold their position.
In last quarter's review we stated the following:
... patient long term investors benefit by having their position established long before the rest of the market decides to invest. CREE is likely to become yet another example of this before the end of 2008.
We think this statement might become even more prophetic as the year progresses.
Note: In accordance with Briefing.com's Trading Policy, the author has a personal position in Cree.
reported their fiscal 2008 Q2 results after the close on Tuesday, January 22, 2008. While some might view the results as positive because Cree beat earnings estimates, the more significant positive news is the statements made about the nature of the market for commercial LED lighting. It is this market, we believe, that will eventually be the driver for Cree products. We recommend continued holding for those investors following our investment premise for the company.
Exiting The Waiting Period
After it became clear in August of 2006 that Cree's presence in the handset LED marketplace had weakened substantially, we declared that Cree had entered a "Waiting Period."
The waiting period amounted to an unknown period of time before the market for commercialization of white LED products developed. While Cree itself would not be a vendor of application products in this market, they would be a vendor to other application companies.
Last quarter, we noted that the commercial market for LEDs might finally be showing some signs of developing. We stated in our review of 19-Oct-07 Cree FY08 Q1 Earnings Review the following:
Last quarter, however, the company made "hesitant and vague statements" about the commercial lighting market, causing the stock to decline sharply after the call. CREE fell from approximately the $27 level to below $23 in less than 10 days of trading.
This quarter, in contrast, however, the company made extremely positive and encouraging statements about the lighting marketplace.
This is the first time the company has made positive statements about the development of the market in anything other than vague terms about the potential in the future.
This quarter's results not only backed up those positive statements by the company, but showed even stronger signs of movement towards maturation.
The Emerging Market For LEDs
The good news for this quarter is the statements made in the conference call regarding the market for white LED commercial lighting. In addition, and unexpectedly, the video screen market also appears to be showing growth signs. Comments about the lighting screen market were somewhat muted in last quarter's conference call.
Some of the positive remarks made in the conference call included the following:
Commercial lighting and video screen lighting now make up more than 50% of revenue XLamp LED growth is targeted at double-digit growth rates Gross margins are in the 34-36% level for Q3, up from 30% in Q1 and 35% in Q2 Refuted a circulating argument that silicon-carbide substrates are a product disadvantage in the marketplace
In general, these are all continuations of trends that began last quarter. Statements about the notebook market this quarter were much stronger than those made last quarter, however, which is a pleasant surprise.
Some analysts today have reiterated Sell recommendations on the company. Those recommendations appear to be based on the perception that the handset marketplace is still the primary driver for Cree revenues.
If we agreed that handset LEDs were the primary driver of a Cree investment premise, we would strongly agree with a Sell recommendation. An investment in Cree today should be based on the idea that the commercial lighting marketplace is finally beginning to develop.
As with all premature markets, however, there is no guarantee that the market will actually develop. In addition, there is no guarantee that Cree will be a primary beneficiary of that market.
However, we believe that the current valuation of the company makes it an extremely attractive risk/reward proposition for the development of the commercial LED marketplace. The stock remained virtually flat with its valuation of three months ago, but the indications of an emerging market have strengthened.
In addition, Cree's intellectual property situation, which is strongly positioned by what is primarily a manufacturing process patent, makes the company a very solid investment prospect now. We will have more on Cree's intellectual property situation in an upcoming article.
Cree 08Q2 Results
The following table summarizes Cree's actual revenue and earnings for the quarter, compared to the consensus estimates in place prior to the report. Cree uses a June 30 fiscal year.
CREE Q2 FY2008 (12/31/2007) Actuals Estimate Consensus Range
Revenue, $M $119.0 $116.4 $108.8 to $119.0
EPS, including stock expense, $ $0.06 $0.06 $0.03 to $0.08
EPS, excluding stock expense, $ $0.13* $0.11 $0.08 to $0.12
Source: Reuters
Obviously, these are good results, however they are not the drivers for the stock today.
*The non-GAAP EPS number of $0.14 stated by Cree included a $0.01 per share one-time tax benefit. It is unclear whether this charge was included in the consensus analysis estimate of $0.11. We have listed the comparison of non-GAAP EPS as $0.13 against estimates of $0.11 to be on the conservative side.
However, in our opinion, the actual EPS results and revenue results are not the story of this quarter. The positive reinforcement of the idea that the commercial lighting market is beginning to emerge is the principal take-away from this quarter's results.
Conclusion
In the Ahead of the Curve column of 11-Aug-06 "Cree 06Q4 Review - Cree Enters Waiting Period" we stated that "it takes a very patient investor to stay invested in a company in this type of situation."
However, investors who either opened new positions at that time, at $18, or continued to hold existing positions, have now been rewarded for that patience. With the stock at the $28 level, the past 18 months represent a return of approximately 55%.
Ironically, we view today's $28 level as much more appealing for investors wishing to open new positions than we would have three months ago. The price is at the same level, but there are much stronger indications that the long-awaited market might actually eventually arrive.
As patient long term investors, we continue to recommend that other investors following our four-year-old premise continue to hold their position.
In last quarter's review we stated the following:
... patient long term investors benefit by having their position established long before the rest of the market decides to invest. CREE is likely to become yet another example of this before the end of 2008.
We think this statement might become even more prophetic as the year progresses.
Note: In accordance with Briefing.com's Trading Policy, the author has a personal position in Cree.
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