Cree: From Penthouse to Outhouse and Back Again (CREE, VECO, RBCN, AIXG)

LED lighting maker Cree, Inc. (NASDAQ: CREE) set a 52-week high in April 2010 at over $83/share. The stock hadn’t hit that mark for more than 10 years. Then some of the glow dimmed as the company failed to impress analysts with either its 2010 fiscal year results, reported in August, or its first quarter 2011 results reported in October. Cree’s shares posted a new 52-week low following its first quarter earnings release.

The company’s net income was growing nicely, but revenues were soft and the company’s own outlook for the second quarter was lower than analysts expectations. Cree simply couldn’t get any love.

That began to turn around in November with a ratings boost from a couple of firms and a very positive outlook for LED lighting in general. Competitors including Veeco Instruments Inc. (NASDAQ: VECO), Rubicon Technology, Inc. (NASDAQ: RBCN), and Aixtron Aktiengesellschaft (NASDAQ: AIXG) have followed the same general trajectory, but Cree’s recovery since October has been along a steeper path.

The primary worry for LED lighting, and Cree in particular, has been revenue growth. LED lights are very costly, around $50 for a 40-watt light. That light uses only 9 watts of electricity and will last for up to 20 years.

Uptake has been slow because the economy has been slow, but costs are falling fast. In the first quarter, Cree’s cost of goods sold totaled $1.13 million, compared with $825,000 in the prior year. That’s a jump of 37%. Sales grew to $268.4 million from $169.1 million in the same period a year ago, a rise of 59%. That’s a very good trade-off.

Cree does not report its revenues by segment, choosing instead to lump everything into a single segment. That makes it impossible to tease out revenue and earnings from different parts of the business, but there is probably one place that Cree stands apart from its competitors.

The company provides a components business which offers technical help and support to Cree’s customers who make and sell their own LED lighting products. Cree is selling solutions, not just LEDs.

Can Cree continue to climb the revenue ladder? Absolutely. The Chinese market for LED street-lighting was strong earlier in 2010, but the government ordered a pause to re-evaluate. That pause is expected to end in the first calendar quarter of 2011, and orders are expected jump for the LED makers.

Cree has demonstrated that it can lower its costs and boost its revenues. Gross margins grew from 44% in the first quarter of 2010 to 49% in the first quarter of 2011.

Finally, Cree expects to maintain its focus on its component business. This is a high margin business and it is exactly what the company should do to keep its revenues growing.

Paul Ausick