Cree: Here Comes the Light

After two very disappointing earnings calls in a row, Cree (WOLF -2.45%), the developer and manufacturer of LED lighting and semiconductor products, finally hit one out of the park and investors are beginning to see the light.

Solid earnings beat
In just about every way, the recent earnings results from Cree impressed. The company beat the average analyst estimate on both the top and bottom lines. For the second quarter, revenue came in at $415.1 million, which easily beat the average estimate of $412.5 million. However, on the earnings per share front Cree fared even better as the company reported a profit of $0.46 per diluted share, which soared past the average estimate of $0.39. 

Also, on a year-over-year basis Cree reported very impressive results. The company's second-quarter revenue of $415.1 million and EPS of $0.46 represent nice growth in comparison with the prior year's second quarter. Year-over-year, Cree's revenue grew 20% from $346.3 million and Cree's EPS grew a staggering 54% from $0.32 per diluted share. 

Management targets third-quarter revenue of $390-$420 million and diluted EPS of $0.19-$0.26. The results sparked a nice 7% rally for shares of Cree, which have struggled mightily in recent quarters despite a rising market. 

Future growth looks bright
Future growth estimates for Cree indicate that the company's success is not just behind it but also in front of it. The following breakdown shows the growth projections for Cree and Acuity Brands (AYI -1.46%) for fiscal 2015: 

The first major takeaway is that both companies are projected to grow well in fiscal 2015, which bodes well for the entire sector. However, Cree is expected to grow revenue at more than double the pace of Acuity Brands. Cree's EPS growth is also projected to be much more robust than that of its peer.

When we take into account valuation, Cree looks expensive. The company's trailing 12-month P/E ratio of 79.49 is extremely elevated compared to Acuity Brands' trailing P/E of 38.92. However, on a forward-looking basis, Cree appears more reasonably priced as the company's future 12-month P/E ratio of 30.57 is only slightly higher than Acuity Brands' future P/E of 26.09, despite vastly superior growth projections for Cree. 

This indicates that the market has not yet fully priced in the company's robust growth going forward, despite the recent powerful rally in shares of Cree.

Here comes the light
There were many other important takeaways from the company's conference call. The first is that Cree continues to amount an impressive cash hoard. The company added another $96 million in the quarter and now has $1.2 billion in cash, which represents 15% of Cree's $8.04 billion market capitalization. Perhaps even more impressive, Cree remains completely debt-free. 

Also, the company continues to introduce new products. Chairman, President, and CEO Charles Swoboda explained, "Our first priority is continue to lead with innovation across our product lines and drive the cost parity with conventional technology. In lighting, we continue to make great progress on both fixtures and bulbs." 

In the second quarter, Cree introduced the LEDway HO series of bulbs and expanded its LED bulb product line to include the 75-watt warm and cool white replacement bulb. 

Perhaps most important, the company continues to build the Cree brand of bulbs. The company's partnership with Home Depot has paid off and Cree's management has continued to reinvest the profits from the operation into further expanding its marketing initiatives, which should drive further awareness among consumers. 

Hit the switch
After a series of massive earnings disappointments, management at Cree appears to have finally righted the ship. With the ability to cut costs and increase visibility in the future, due largely to management's efforts at strengthening the Cree brand itself, the company seems to have gotten back on track and its goals are clearer than ever.

Since Cree is projected to deliver robust growth in fiscal 2015 and it remains relatively fairly valued, the company can once again be considered for long-term growth.