At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
Is that a light at the end of Cree's tunnel?
It's been four months since Wall Street last lined up to take potshots at Cree
Well, folks, times are changing. Yesterday, Cree stunned the skeptics with a fiscal Q4 report that showed much better results than anticipated. Now it's reaping its reward in the form of a big upgrade from ace analyst Canaccord Genuity.
While acknowledging declining revenues and profits at Cree, Canaccord argued that management "has adequately reset expectations." At the same time, the analyst sees Cree taking concrete steps to improve its business -- working down "inventory levels relative to sales," adding "a few accretive margin points," and capitalizing on "a bifurcation in the LED market in which the low end [i.e., Cree] gets commoditized but the high-end market maintains a more robust profile."
Going forward, Canaccord expects Cree to, at the very least, exceed "bearish buy-side expectations." Result: The analyst argues that "shorts [will] begin covering and money on the sidelines [will] explore building positions again following the reset." The banker now sees Cree shares hitting $39 within a year. But is it right?
Buy these numbers?
On the surface, it seems an easy question. Cree today sells for just 22 times earnings, and is pegged for 22% long-term earnings growth. That looks like a fair price at worst. If you agree with General Electric
There's just one problem: The company's still not churning out cash the way it should.
Over the past 12 months, Cree says it earned more than $146 million in GAAP profits. But further up the LED supply chain, LED manufacturing equipment makers like Veeco
When I look at Cree, I don't see a "22 P/E company" growing at 22%. I see a company valued at 270 times its annual free cash flow. Everyone says it will grow at 22%, but here and now, Cree is generating the least free cash flow it's earned at any time in the past five years, including the very cash-poor 2007.
To be crystal clear: No, I don't see this as an argument in favor of buying Cree.
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