It seems like everyone’s bullish on Cree’s light-emitting diode (LED) business these days. Shares of the company’s stock rose as much as 16 percent in morning trading Wednesday after it reported second-quarter profit above Wall Street’s expectations and the Durham, N.C.-based company said it sees third-quarter earnings coming in ahead of analysts’ average forecast as well. “We aggressively urge investors to accumulate the stock for a multi-year secular trend and reiterate our Buy rating,” wrote American Technology Research analyst Andrew Huang in a note to clients.
Investors are enthusiastic enough to overlook the fact that Cree’s net income fell 60 percent, to $6.6 million, or 8 cents a share, from $16.5 million, or 21 cents, a year earlier. So why is Cree getting such a shining reception on Wall Street?
Well, the recently passed Energy Bill means traditional incandescent bulbs will soon be banned, which means that LEDs will start to make their way into more and more lighting fixtures. While compact fluorescent light bulbs are getting the most attention as the next replacement for incandescents, the real future is in light-emitting diodes (LEDs). And as companies like Cree bring the cost of LEDs down, they will become affordable for more mainstream, even residential, use.
To see proof of a bright LED future, just look at fundings and M&A. In December alone, light-emitting capacitor maker CeeLite pulled in $4 million in private equity for their paper-thin luminous plastic sheets, and LED maker Element Labs raised $12.7 million in Series B funding for their gigantic LED displays.
The lighting giants are repositioning themselves to try to grab hold of the LED market as well. Philips, the world’s largest producer of light bulbs, recently acquired Genlyte for $2.7 billion, and GE has been rumored to be eying Cree. Notably, however, Philip’s Lumileds (a Cree competitor), was recently forced to recall a batch of its product.
Investors haven’t always been so bullish on Cree. Back in October the company’s stock dropped more than 11 percent after Canaccord Adams analyst Jed Dorsheimer cut the stock to “sell” and noted that Cree was unlikely to meet sales estimates for the then-current quarter. Almost a year ago, Cree shares were trading at a 52-week low of $15.27.
But as American Technology Research Andrew Huang points out, the company’s gross margins are improving, which he notes was “a key inflection point given that bears have long contended that Cree would never be able to profitably transition from the chip business to the packaging business.” In the earnings conference call CEO Swoboda said that the company’s gross margin increased to 35%, “which exceeded our target range to the yield improvements across several product lines.”
And with the future of lighting looking to LED, Cree is in a good position. As Cree CEO Chuck Swoboda said in an interview in October: “I don’t know any technology available in the next five to 10 years that can do more to change the energy equation than LED lighting.”