Soft Lighting: Demand Issues Highlighted In Cree's Earnings, Mixed Guidance

Following the release of fiscal fourth-quarter results by Cree, Inc. CREE, sell side highlighted the softness in lighting demand. The company reported solid results but issued weak first-quarter guidance.

As such, KeyBanc Capital Markets said it remains Sector Weight on Cree, with the firm estimating a fair value of $21. Meanwhile, Deutsche Bank maintained its Hold rating on shares of the company but lowered its price target from $24 to $22.

At time of writing, Cree shares were slumping 5.28 percent to $21.82.

KeyBanc Monitors Traction Before Becoming Constructive

KeyBanc noted its fourth-quarter revenues beat estimates and earnings per share were in line, thanks to healthy LED revenue and high demand in its Wolfspeed segment. That said, the firm said lighting revenues saw a modest sequential increase but remained soft due to overall soft market conditions.

On the outlook, analyst Daniel Baksht said fiscal year first-quarter revenue is expected to increase modestly quarter-over-quarter, helped by Wolfspeed, and that earnings are expected to stay flat at the midpoint amid plans to accelerate investments in Wolfspeed.

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KeyBanc pointed to the company's plan to spend about $150 million in capex at Wolfspeed in fiscal year 2018 amid high demand. The investment, according to the firm, will be channelized toward doubling wafer capacity and its power device capacity.

"The near-term impact of this investment should hurt free cash flow and EPS, but longer term, we estimate Wolfspeed will now represent 23% of the Company's total revenue in FY19, up from just 15% in FY17, and the mix shift should benefit corporate-wide margins," the firm said.

The firm sees rationale in the company's investment in Wolfspeed and its focus on growth segments in LED products, as it continues to lose share in lighting. That said, the firm thinks it could stem the market share loss in its lighting business if it makes a meaningful acquisition in the space.

Turnaround In Cree Growth Story Likely

Citing the positive fundamentals Cree's management highlighted, Deutsche Bank analyst Vishal Shah said he now sees a turnaround of the Cree growth story. The analyst is of the view the risk-reward is starting to become interesting.

However, the firm believes investors would likely wait for a few more quarters of execution before getting more aggressive on shares, given the Wolfspeed capacity constraints and mixed near-term trends in lighting/LED segments.

Deutsche Bank said it likes Cree's solid Wolfspeed fundamentals, an automobile LED win announced by the company and the momentum seen in the lighting business. On the other hand, the firm said it did not take a liking to the deterioration in margins and the company's negative cash flow guidance amid planned capex investment of about $220 million.