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Bear of the Day: Cree Inc. (CREE)

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It is typically not a good thing for the Committee on Foreign Investment in the United States (CFIUS) to reject a sale of a segment of your business due to national security concerns.  Further, when that decision also causes your company to incur additional expenses totaling millions of dollars it tends to be difficult to recover from those losses.  This is what happened to our Zacks Bear of the Day, Cree Inc. (CREE - Free Report) .

This Zacks Ranked #5 (Strong Sell) company is a market-leading innovator and manufacturer of semiconductors that enhance the value of solid-state lighting, power and communications products by significantly increasing their energy performance and efficiency. Key to Cree's market advantage is its world-class materials expertise in silicon carbide and gallium nitride for chips and packaged devices that can handle more power in a smaller space while producing less heat than other available technologies, materials and products. Cree drives its increased performance technology into multiple applications, including exciting alternatives in brighter and more-tunable light for general illumination, backlighting for more-vivid displays, optimized power management for high-current switch-mode power supplies and variable-speed motors, and more-effective wireless infrastructure for data and voice communications. Cree customers range from innovative lighting-fixtures makers to defense-related federal agencies.

Recent Earnings Report

On April 26th, Cree reported Q3 Fiscal year 2017 earnings where they significantly missed the Zacks consensus earnings estimate (-0.11 actual vs. 0.9 estimate), but did beat the Zacks consensus revenue estimate.  Cree saw revenues decrease by -7% compared the year earlier, and -15% on a sequential basis.  Further GAAP income came in at -$99 million compared to +$152,000 in Q3 16.

The company had intended to sell their Wolfspeed segment during the quarter to Infineon Technologies AG, but the sale was terminated because “the Committee on Foreign Investment in the United States (CFIUS) determined that the transaction could not be approved due to national security concerns.”  This caused a tax expense charge of $86 million, and another additional $12 million in expenses.  

Management’s Take

According to Chuck Swoboda, Chairman and CEO, “Q3 non-GAAP results were within our target range. Our Wolfspeed and LED Products businesses performed at or above their targets for the quarter, while Lighting Products came in a little below plan due to softer market conditions and the lingering effects of the third party product driver issue that we mentioned in Q2. We believe the factors that impacted our lighting business are temporary and we target improvement in all three businesses in Q4.”

Price and Earnings Consensus Graph

As you can see in the graph below, Cree has seen their stock price continue to fall since late 2013.  Further earnings estimates have been trending downwards as well.

Cree, Inc. Price and Consensus

Cree, Inc. Price and Consensus | Cree, Inc. Quote

Declining Earnings Estimates

Due to the poor earnings report, earnings estimates have significantly declined over the past 7 days; Q4 17 dropped from $0.03 to -$0.09, FY 17 declined from $0.41 to $0.03, and FY 18 has slipped from $0.36 to $0.20.

Bottom Line

Outside of the Committee on Foreign Investment’s decision to not allow the sale of their Wolfspeed division, their lighting/LED segment saw softness as well, which hurt both the top and bottom lines.  While management is attempting to fix these situations, it will take more than 1 quarter to fix.  

If you are inclined to invest in the Semiconductor – Discrete segment it would be best to look into either Tokyo Elector (TOELY - Free Report) , and or Vishay Intertechnology (VSH - Free Report) , both of whom currently carry a Zacks Rank #2 (Buy).

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