Why We Remain Bullish On Cree Despite The Recent Steep Fall In Shares ?
Cree‘s (NASDAQ:CREE) stock price has been on a downhill trajectory since the company announced its LED Business restructuring plans in late June, losing almost 14% of its value in the end of the month. The restructuring plan came ahead of higher LED average selling price erosion than previously forecast and the continued under-utilization of Cree’s LED factory. The company decided to restructure the LED Products business to reduce excess capacity and overhead to improve the cost structure moving forward.
Cree’s core markets are suffering from dramatic price reductions to the point that the company had to cut back its manufacturing operations. Moreover, Cree is holding back some of the small output stream in hopes of selling it later when LED prices bounce back. That hoped-for pricing rebound may never happen. Cree’s operating cost savings will help in the short term, but this isn’t a quick and dirty price war. These low prices seem likely to stick around for the long haul. LED lighting is turning mainstream in a big way and this is great for unit sales volumes.
Despite the short-term weakness, CREE remains a fundamentally strong company, in our view. The company’s growing focus on LED segment, to an extent that CREE announced the spin-off of its power and RF segment, and its more conservative pricing outlook for the future offers it strong, long-term growth potential. We will explain these factors in detail below.
See Our Complete Analysis for Cree Here
Cree To Position Itself In LED Lighting Market, While A Huge Surge Is Anticipated In LEDs
A general shift to LED lighting in the lighting market is expected to be the primary growth driver for the LED industry, as demand from the backlight market nears saturation. LED lighting market is anticipated to grow 45% per year through 2019, driven by declining price points and rising interest on the part of the channel in pushing LED products to consumers. LED lighting is expected to account for 80% of the entire lighting market by 2020, creating a market that will be as big as $94 billion. [1]
Cree is confident that it is well-positioned to continue to win in LED lighting. Though the company has made significant progress growing both the volume and product base of its lighting business over the last several years, it believes that there is still a lot of untapped potential in terms of both revenue and profitability. Cree claims that it continues to gain share in the commercial lighting market as demand rebounded in late March. The company has a strong product pipeline and is building good sales momentum for its products.
Though the LED landscape remains highly competitive, Cree believes that its high power LED technology positions the company for long-term success in high performance LED lighting applications. The collaboration with Lextar can help Cree expand its presence in the mid-power segment.
CREE To Revamp Its Pricing Strategy Which Acts As The Primary Growth Driver
Cree and US retailer Home Depot developed what they have called a formula of delivering innovative products at price points that give consumers more reasons to replace their energy-wasting incandescent bulbs, lowering the prices of the Cree LED Bulb product line by as much as 23%. With the aim of driving further adoption and expanding its market, Cree has also introduced the first 100W replacement LED bulb, which looks and lights like a conventional light bulb. The new 100W Cree LED Bulb delivers LED light at a breakthrough price of just $19.97, which the company claims is the lowest-priced 100W LED replacement bulb.
The company is targeting restructuring charges of approximately $85 million. Of the $85 million, $47 million is projected to come from capacity and overhead cost reductions, $27 million from Channel revenue reserves and $11 million from inventory reserves. The company expects that operating expenses for the fourth quarter of the fiscal year 2015 ending on June 28, 2015, will reflect the majority of the capacity and overhead related charges. Cree anticipates that the remaining charges will be incurred in the first half of the fiscal year 2016.
By quickly tweaking various components, Cree could well achieve breakthroughs on the bulbs’ cost and performance that its competitors can not. Cree has staked its entire research and development efforts on the ascent of the LEDs as well as LED lighting. In the coming decade, as the consumer market – along with the much larger industrial and commercial lighting markets – transition from fluorescent and incandescent lights to LEDs, Cree sees vast potential for growth.
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Notes:- Why Investing In CREE Looks Like A Bad Idea, Seeking Alpha, December 3rd. 2014 [↩]