Cree Inc. (CREE) recently reported better than expected Q3 results that included 78% sales growth from last year and a 10% earnings surprise. Although shares did trade lower off the news, the long-term trend is still very bullish for this Zacks #1 rank stock.
Company Description
Cree, Inc. has a total of three business segments, but its largest is LED (light emitting diode), comprising 87% of the company’s 2009 revenue. The LED segment develops light bulbs and lighting components used for various applications like video screens, gaming displays and mobile devices. Cree was founded in 1987, has a strong international presence and has a market cap of $8.11 billion.
Even though LED technology isn’t new, originally created in 1962, its use in various commercial and consumer applications has gained momentum in recent years because of its superiority over traditional incandescent light sources. The benefits of LED include a longer life, less energy consumption and increased reliability. This dynamic ties into the domestic and global push towards energy conservation, helping Cree rebound from the economic downturn of 2008 and early 2009 with impressive vigor, on display with record Q3 results from April 20 that blew past expectations.
Record Third-Quarter Results
Sales for the period were up 78% from last year to $234 million. Earnings came in at 43 cents, 10% ahead of the Zacks Consensus Estimate. Cree has surprised in each of the last four quarters by an average of 24%.
CEO Chuck Swoboda touched on the company’s results and the lED space, saying “The LED lighting revolution continues to gain momentum and we remain focused on extending our leadership position while we build the scale, cost structure and channels to win in the market.”
Not only did Cree see big revenue gains, it was also able to expand its margins, with gross margin up an amazing 1600 basis points to 47.9% and operating margin jumping 2200 basis points to 24.2%.
Cree also strengthened its balance sheet during the quarter, adding $37 million to its cash and investments, now up to $991 million against no long-term debt.
Estimates and Guidance
Cree provided bullish guidance on the call, saying it expects full-year revenue between $255 and $265 million, better than the previous consensus of $242 million. Estimates have yet to adjust, but had been trending modestly higher into the number, with the current-year adding two cents in the last month to $1.42 and the next-year adding 8 cents to $2.02, a solid 42% growth projection.
After the big run, shares do look a bit pricey, trading with a forward P/E multiple of 54X, a steep premium to the overall market. The company’s P/B multiple of 4.7X is better than the S&P’s 5.1X but higher than the industry average of 1.3X. An ROE of 5% puts Cree in line with its industry competition.
The Chart
CREE has been screaming higher for most of the last 16 months after bottoming out in December of 2008 just above $12, recently hitting a new 52-week and all-time high at $83.38. Shares have pulled back on the number but should find support from the trend line that has been in play since early February, take a look below.
Michael Vodicka is the Momentum Stock Strategist for Zacks.com. He is also the Editor in charge of the market-beating Zacks Surprise Trader Service. Zacks Investment Research
