I should probably be careful what I say about LED specialist Cree
To be sure, the results for the company's fiscal second quarter aren't likely to get people all that fired up. Revenue was up 10%, and net income from continuing operations actually fell by a fair bit. On a more positive note, sales and margins did tick up slightly on a sequential basis.
For the time being, a lot of the Cree story revolves around the company securing more orders for the higher-margin XLamp product, further penetrating the LCD backlight market (which is 80% controlled by Japan's Nichia), and improving production costs. For instance, while LED product shipments were up 26% versus last year's second quarter, costs per unit declined 9% versus a drop of 13% in ASPs. So while demand conditions seem to be all right, there's more work to do on the production side, especially since the company experienced some capacity constraints with XLamp products.
Ultimately, I still have some confidence that management will figure out the production side. It's the demand side that still has me a little nervous. Going up against a foe with 80% market share is daunting, and other potential markets like LCD TVs and automobile headlights have their own respective challenges.
Although the stock is up a bit for the last year, it has lagged the overall semiconductor sector. That's doesn't automatically make it cheap, though. In fact, you've got to assume better than 20% compounded annual free cash flow growth over the next ten years to get to a price that makes the stock look reasonable. Now, some companies can achieve that level of growth and success in the small LED market, and LCD TV market would certainly give Cree a fighting chance. All the same, that's a little more success than I'm ready to bet on today.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).