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Cree (CREE) Up 3.3% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Cree (CREE - Free Report) . Shares have added about 3.3% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Cree due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Cree Q4 Loss Narrower Than Estimates

Cree Inc. reported non-GAAP loss of 18 cents per share for fourth-quarter fiscal 2020, which was narrower than the Zacks Consensus Estimate of a loss of 20 cents. Notably, the company had reported earnings of 11 cents per share in the year-ago quarter.

Revenues were $205.7 million, which surpassed the consensus mark by 3.5%. However, the top line fell 18% year over year on declining Wolfspeed and LED Products revenues.

Quarter Details

Wolfspeed revenues declined 19% year over year to $108.4 million, accounting for 53% of total revenues. The downside was due to supply constraints. The company's Wolfspeed segment's products comprises power devices and RF devices, and silicon carbide (SiC) and gallium nitride (GaN) materials. In materials domain, deferred shipments and weaker demand impacted revenues in the fiscal fourth quarter. Strength in the power and automotive business, and improved sales of RF devices failed to offset the decline in revenues.

Management is banking on synergies from partnership with Arrow Electronics, and incremental adoption of SiC products in new applications.

The company’s expertise in SiC technology and expanding clientele despite coronavirus-induced business headwinds is instilling confidence in the stock. Shares of Cree have returned 48.3% year to date, compared with the industry’s growth of 21.1%.

LED Products revenues were $97.3 million, down 17% on a year-over-year basis. Notably, it accounted for 47% of total revenues. The company's LED Products segment's products consist of LED chips and LED components. Supply disruption associated with manufacturing facilities affected LED revenues.

Non-GAAP gross margin contracted to 26% from 37% reported in the year-ago quarter. Segment wise, LED Products gross margin contracted to 35% from 50% reported in the year-ago quarter, owing to lower revenue base.

Wolfspeed gross margin contracted 100 basis points (bps) to 23%. Wolfspeed gross margin was impacted by reduction in factory efficiency on account of the pandemic induced safety measures. Management noted that decrease in yields and factory transitions are headwinds to gross margin performance until production shifts to new Mohawk Valley Fab.

Non-GAAP operating loss during the quarter was $28.3 million against operating income of $9.9 million in the year-ago quarter.

Balance Sheet & Cash Flow

Cree had cash, cash equivalents & short-term investments of $1.252 billion as of Jun 28, 2020 compared with $852.9 million as of Mar 29, 2020.

During the fiscal fourth quarter, cash provided by operating activities was $10.5 million compared with $27.7 million cash utilized in the prior quarter.

Free cash outflow was $59.7 million, compared with free cash outflow of $97.5 million in the prior quarter. Capital expenditure amounted to $70 million in the fiscal fourth quarter.

Guidance

For first-quarter fiscal 2021, Cree expects revenues in the range of $203 million to $217 million.

LED Products revenues are projected in the range of $96-$100 million. LED Products business is anticipated to gain from improving dynamics in supply chain. Wolfspeed revenues are anticipated between $107 million and $117 million. Wolfspeed business is anticipated to gain from momentum in the device business and improving factory utilization.

Non-GAAP loss is projected in the range of 20-24 cents per share.

Non-GAAP gross margin is expected in the range of 25-27%. Wolfspeed and LED margins are expected to be in the range of 35.5-37.5% and 19.5-21%, respectively.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review. The consensus estimate has shifted -23.11% due to these changes.

VGM Scores

At this time, Cree has a subpar Growth Score of D, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of F on the value side, putting it in the fifth quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Cree has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.


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