Cree: Why Investors Can Expect a Turnaround
LED lighting company Cree (CREE) has faced a troubling time on the stock market this year. This is not surprising, as the company's growth has slowed down in the past few quarters, and this clearly reflects in its last-reported results. When Cree had released its fourth-quarter results earlier this month, its revenue was down 12% year-over-year, while the company also reported a net loss of $21 million as compared to a profit of $51 million in the prior-year period.
The weakness in its financial performance was a result of significant restructuring charges borne by the company during the quarter.
The way ahead
Cree management is positive about the growth prospects of the company, primarily encouraged by the benefits expected from the strategic restructuring program executed during the quarter. As a part of its plan, Cree targets on introducing a prospective initial public offering of its Power and RF business. It has presented a private draft registration statement to the U.S. Securities and Exchange Commission.
The planned restructuring of Cree's LED lighting business will lead to weakness in the company's cash flow position, but the move deliver long-term growth for the company. This is because Cree will be able to use the funds from the IPO that it will then invest in its core business in order to improve financial performance.
Cree recently signed an international LED chip patent cross-license contract with Epistar, under which it will be eligible to get a licensing fee and royalty costs from Epistar. In addition, Cree acquired APEI (Arkansas Power Electronics International), which develops power modules and unique power electronics applications. The strategic acquisition will allow the Power and RF business of Cree to enhance its leadership position and deliver superior market performance with outstanding SiC power modules.
Thus, by improving the product portfolio of its power and RF business, Cree will be able to raise more funds from the market during the IPO. On the other hand, as far as its core business is concerned, Cree recently launched the WaveMax Technology, which is an optical innovation that allows advanced light occurrences and generates higher value, outstanding visual performance, and energy-saving possibilities.
The company has also introduced the Cree XLampXHP35 family of LEDs, which deliver 50% greater light output as compared to the company's earlier best-performing single-die LED. This will help Cree develop cutting-edge designs with smaller size and reduced system costs. As a result of its focus in this area, Cree will be able to reduce its cost base going forward, and this will impact its margins positively.
Moreover, Cree is focused on expanding its product portfolio through strategic acquisitions as well, which will help it add sophisticated low-cost and high-performance capabilities.
JPMorgan analyst Paul Coster rates Cree as Overweight with a price target of $30.00. The analyst expects the stock to deliver sustainable growth at a logical price. However, the analyst sees weaker gross margins in the LED products category, which might result in low earnings for fiscal year 2016.
Meanwhile, TheStreet Ratings team rates Cree as a "Hold" with a ratings score of C. They believe that Cree's major strengths include its robust financial position. Contrastingly, the company's declining net income and poor return on equity are headwinds. Thus, it looks like analysts are confused about Cree's growth prospects, considering the weaker global commodity pricing environment and generally disappointing demand.
But, investors should not forget that Cree is taking smart steps to execute a turnaround in its business. Additionally, the company has an attractive PEG ratio of 0.63, which indicates impressive growth prospects as compared to the industry's average PEG ratio of 0.93. Additionally, Cree has a robust financial position with impressive total cash position of $713.19 million as compared to debt of $200 million only, which will enable the company to make investments in the long run.
Thus, I think it will be wise to buy Cree's weakness as it can deliver long-term returns due to a strong financial position and its restructuring moves.