Cree's 31% Dip Triggers JPMorgan Upgrade On Valuation

Cree, Inc. CREE — a manufacturer of semiconductor products for power and radio-frequency applications and LED lighting — has seen its shares slump 31 percent since early August, rendering a more balanced risk-reward profile, according to JPMorgan.

The Analyst

Analyst Paul Coster upgraded Cree from Underweight to Neutral and maintained a $35 price target. 

The Thesis

The weakness in Cree shares is a function of "uneventful" fourth-quarter results reported Aug. 11; the potential impact from China tariffs; and general weakness in the semiconductor space, Coster said in the upgrade note. (See his track record here.) 

Looking ahead to fiscal 2019 Q1 results, the analyst said he expects pro forma EPS of 12 cents and revenue of $409 million. This is roughly in line with the consensus, which calls for EPS of 12 cents and revenue of $407 million.

Coster estimates year-over-year sales growth of 13.6 percent, with 90-percent growth in Wolfspeed; an 8-percent drop in lighting; and a modest increase in LED products.  

Gross margins are likely to benefit from a product mix shift and expand 231 basis points to 30.6 percent, the analyst said. Pro forma operating margins should arrive in the low single digits at 4 percent, he said. 

Coster expects free cash flow to remain pressured throughout the fiscal year due to Wolfspeed investments.

The readthrough from rival Acuity Brands, Inc. AYI's results reported in early October suggests a hit to gross margins from pricing pressures, inflationary pressures on components and likely softening of demand due to price hikes driven by tariffs, according to JPMorgan.

The Price Action

Cree shares have lost about 3.9 percent year-to-date.

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