Cowen Trims PT on Cree (CREE) to $36 Following Q1 Results; LED Will Continue to Be Challenging Business

Cowen and Company moves its price target on Cree (Nasdaq: CREE) from $36 to $32 and maintains a Market Perform rating on the stock.

Analyst Jeffrey Osborne noted three key observations with the price target adjustment:

Adverse Developments in the Ultra Competitive LED Chip Market Weigh on Cree's Earnings This Quarter

Cree reported FY1Q15 revenue of $427.7mn, in-line with their amended forecast of ~$428mn and our estimate of $427.7mn, while slightly under consensus estimates of $432.6mn. However, this number was significantly below their original $440mn to $465mn guidance for the quarter due to weakness in China for LED chips. This was likely due to a supply and demand imbalance in the LED market compounded by a highly competitive pricing environment. Management noted delays in outdoor China projects. Additionally, LED prices in the mid-power segment have been driven below what Cree's management believes to be economically sustainable levels by Asian competitors. Lastly, waning demand of high-power LEDs, particularly from China has led to lower volumes and likely additional price concessions. Cree's LED product revenue decline 20.4% y/y and 13.0% sequentially in the face of these significant headwinds with management expecting an additional 12% decline in Q2.

Management of Excess Inventory and Shift Toward Non-Bulb Lighting Should Help December Quarter Margins

Management highlighted that they will be able to rely on excess supply generated, due to lower volumes in the previous quarter to address future demand. This will allow them to slow down production at the factory, which should help to reduce costs. Additionally, Cree's Lighting segment has gained momentum increasing by 50.8% y/y to $223.1mn. Similarly, power and RF revenue has increased by 23.7% y/y to $31.0mn. These improvements should help to stabilize gross margin in the near term. The company expects a mix toward non-bulb lighting products in the December quarter to aid margins as Home Depot is fully stocked for the upcoming lighting season.

Headwinds in the Short Term Likely; Focus on Long-Term Fundamentals

We believe that the LED chip market is going to continue to be challenging with the advent of many mid-power market entrants and anemic demand in the high-power market. Over the longer term we believe investors should focus on new product launches, which leverage Cree's technological advantage. We expect to see a new bulb design which will improve margins. Lastly, new chipsets like the XPL, which are 50% brighter than previous designs, are likely to help to further differentiate Cree's offerings from the cacophony of other products. We believe there are minimal nearterm catalysts until the company can show leverage in either LED chips or improve the trajectory of the bulb margins.

For an analyst ratings summary and ratings history on Cree click here. For more ratings news on Cree click here.

Cree closed at $33.15 yesterday.

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