There's a certain slant of light,
On winter afternoons,
That oppresses, like the weight
Of cathedral tunes.
-- "There's a certain slant of light" by Emily Dickinson
As that slant of light weighed on our narrator in this tribute to National Poetry Month, investors put pressure on LED light specialist Cree (Nasdaq: CREE) this winter. From early November to the end of December, Cree shares fell 28%.
But 2012 has been a very different story, with a market-beating 43% return in the new year.
The company will publish third-quarter results after Tuesday's closing bell, so it's time to ponder what that event might do to share prices. Has Cree bounced back too far and too fast, or do investors still underestimate the company?
Word on the Street
Management expects to post revenues of roughly $300 million, with non-GAAP earnings falling somewhere between $0.18 and $0.25 per share. Analysts are taking these numbers as absolute gospel. At the midpoint of these ranges, we'd be looking at 37% year-over-year sales growth but falling profits.
The incredible shrinking margins come from two unrelated places. For one, Cree expects to spend a lot on sales and marketing to drive that terrific revenue growth. For another, operating costs will suffer from "the timing of patent-related litigation." When Cree bought lighting-fixture maker Ruud Lighting last summer, the new subsidiary came with complete with a couple of patent infringement complaints lodged against it.
Moreover, a division of Dow Corning has filed a defensive suit to ensure that Cree never sues the Dow Chemical (NYSE: DOW) and Corning (NYSE: GLW) joint venture for trampling on Cree's silicon carbide patents. Dow Corning may want to enter the LED market in a big way, using this suit to pave the way for a smooth entry.
Management doesn't like to talk about courtroom shenanigans, so don't expect much of an update on the litigation front. Any pearls of lawsuit-related wisdom management drops will be an unexpected bonus.
Going forward
LED lighting is an important alternative to the light bulbs we're not supposed to use these days, and Cree is a best-of-breed supplier of these lights. Investors have been worried -- and rightly so -- about collapsing product prices as LEDs hit the mainstream. The competition here includes multinational conglomerates General Electric (NYSE: GE) and Siemens (NYSE: SI), and they like to turn up mass-market manufacturing to 11. That's a surefire way to flood the market and push down prices until the delicate balance between supply and demand rights itself again.
This particular imbalance should even out or even reverse in 2012. That's why analysts are upgrading Cree like there's no tomorrow, and why the stock bounced so hard off the winter's rock-bottom prices.
In this report, we should look for discussion of the pricing and demand environment. If Cree's manufacturing lines are running at full speed and barely keeping up with consumer demand, we'll know that the light will slant brighter in coming quarters.
Familiar objects like light bulbs and made-in-China gadgets are going away sooner than you know, and Cree rides at the forefront of that revolution. Find out more about the new industrial revolution in a brand-new special report, free to download for a limited time.
