Light-emitting diode (LED) light sources were all the rage when they were first introduced, since they use less energy and last longer than incandescent bulbs. Cree Inc. (CREE.O) was the pioneer. However, as with so many pioneers, it saw an influx of competition, which drove down prices — and profit margins. Where should investors turn a light?
Now Cree is facing the prospect of falling demand and a saturated market and it looks like it is setting up to report a third earnings miss in four quarters based on a negative StarMine Predicted Surprise of more than 35%.
Source: Eikon/StarMine
Dim outlook
Earnings estimates have come down over the last 90 days and the consensus now calls for a narrow profit of 1 cent per share. The SmartEstimate is even lower, seeing a loss of 3 cents per share. Analysts have also revised estimates for earnings and revenue lower for the next year, an indication that the company may struggle for some time.
Source: Eikon/StarMine
Margin worries
The biggest issue for Cree is falling profit margins as the landscape has become more competitive. LED products still account for more than 50% of Cree’s revenues. In the last earnings call, CEO Chuck Swoboda stated that Cree would “restructure the LED business to reduce excess LED chip and component capacity and align the cost structure with the current level of demand.” In short, he acknowledged the challenging environment. All three major margin measures — gross, net and operating — have been deteriorating and are now significantly below the industry medians.
Source: Eikon/StarMine
Dark scores
As you can see in the chart above, Cree scores poorly on almost every StarMine model. The shorts seem to be piling on, and earnings don’t seem to be of strong quality. In fact, inventory days have risen in each of the last four quarters and that rising inventory is in danger of being written down due to obsolescence. All signs point to a weak quarter again when Cree reports earnings and a likely earnings miss.
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