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Cree (CREE) Up 22.8% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

It has been about a month since the last earnings report for Cree (CREE). Shares have added about 22.8% 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 the most recent earnings report in order to get a better handle on the important drivers.

Cree Q3 Loss Narrower Than Estimates

Cree reported non-GAAP loss of 14 cents per share for third-quarter fiscal 2020, which was narrower than the Zacks Consensus Estimate of a loss of 15 cents. The company had reported earnings of 20 cents per share in the year-ago quarter.

Revenues came in at $215.5 million, which lagged the consensus mark by 0.2%. Moreover, the figure fell 21% year over year on declining Wolfspeed and LED Products revenues.

Quarter Details

Wolfspeed revenues declined 19% year over year to $113.9 million and accounted for 53% of total revenues. The drop in revenues was due to weakness in the power business and sluggish sales of RF devices. Further, temporary shutdown of Morgan Hill facility led to the decline.

LED Products revenues were $101.6 million, down 23% on a year-over-year basis. Notably, it accounted for 47% of total revenues. Softness in China amid the COVID-19 outbreak and disruption associated with manufacturing facilities affected LED revenues.

Non-GAAP gross margin was 28%, which contracted 900 basis points (bps) on a year-over-year basis. Segment wise, LED Products gross margin contracted 800 bps to 20% from the year-ago quarter, while Wolfspeed gross margin contracted 900 bps to 40%.

Non-GAAP operating loss during the quarter was $21.4 million against operating income of $23.8 million reported in the year-ago quarter.

Balance Sheet & Cash Flow

Cree had cash, cash equivalents & short-term investments of $852.9 million as of Mar 29, 2020 compared with $951.5 million as of Dec 29, 2019.

During the fiscal third quarter, cash used in operations was $27.7 million compared with $11.8 million cash utilized in the prior quarter.

Free cash outflow was $97.5 million, compared with free cash outflow $53 million in the prior quarter. Capital expenditure was reported at $70 million in the third quarter.

Guidance

For fourth-quarter fiscal 2020, Cree expects revenues in the range of $185-$215 million.

LED Products revenues are projected in the range of $85-$100 million. LED Products revenues are anticipated to be affected by the coronavirus outbreak-led supply constraints.

Wolfspeed revenues are projected in the range of $100-$115 million. Wolfspeed business is anticipated to be affected by coronavirus outbreak-induced lower factory utilization.

Non-GAAP loss is projected in the range of 15-23 cents per share.

Non-GAAP gross margin is expected to be in the range of 25-28%. Wolfspeed and LED margins are expected to be in the range of 33-35% and 19-21%, respectively.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review.

VGM Scores

At this time, Cree has a poor Growth Score of F, however its Momentum Score is doing a lot better with a C. However, 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. Notably, Cree has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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