Goldman Is Selling Cree

• Cree, Inc CREE shares are down 16 percent year-to-date, despite an 8 percent appreciation in the last one month.
• Goldman Sachs’ Brian Lee downgraded the rating on the company to sell, while establishing a price target of $21.
• An expected decline in the company’s earnings warrant a lower stock valuation, Lee stated.

Analyst Brian Lee mentioned that Cree is facing two key challenges in the form of structural deterioration in the growth and margin profile of its core LED chip segment due to Chinese competition and moderating growth in its lighting business.

Growth in the company’s lighting business has slowed to 10 percent y/y, versus a 3-year average of 40 percent. Lee attributes this to Cree’s portfolio being more levered to hardware than software and less exposed to smart lighting in comparison to the company’s peers.

Lee believes that expectations of a possible M&A for Cree are not realistic in view of the company’s recent deconsolidation efforts and the exit of several large players across the segment.

The EPS estimates for F2016, F2017 and F2018 have been reduced from $1.02 to $0.95, from $1.28 to $1.17 and from $1.49 to $1.28, respectively. These changes reflect the expected revenue declines in LED, moderating growth in commercial lighting, declines in consumer bulbs and the risk from China.

A cycle-to-cycle decline of over 30 percent in Cree’s EPS power indicates that the company’s shares should trade at a greater discount to its prior levels, the Goldman Sachs report mentioned.