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Cree stock crushed on weak outlook

LED bulb by Cree
Source: Cree

Shares of Cree fell nearly 15 percent Wednesday after fourth quarter earnings missed analysts' estimates and its guidance was weaker-than-expected.

The LED light maker earned an adjusted 19 cents per share for its fiscal fourth quarter, a penny below estimates. Cree's revenue of $388 million did exceed analysts' projections by $2 million.

The company also issued weak first quarter guidance, with a profit forecast between 10 and 16 cents adjusted, well below analysts' expectations of 22 cents, according to Thomson Reuters data. Sales forecasts were also below estimates.

Investors and analysts are focused on weakness in the lighting products segment, which saw a 13 percent sales drop. Analysts were largely negative on the results, with some citing continued market share loss in its lighting business and others seeing upcoming structural problems in the LED components market.

UBS downgraded shares of Cree to sell from neutral, and cut its price target to $21 from $24.50. Analyst Stephen Chin believes there is still more downside risk to earnings estimates as this quarter's lighting revenue is seen falling 5 to 10 percent from Q4, on a smaller backlog.

In a note to investors, Chin says he is also concerned that "China-based LED competitors could be preparing for another increase in supply," causing price pressure and limits to Cree's LED chip sales upside.

Chin does see one bullish case for Cree. "One catalyst that may lead us to reconsider our rating is if Cree decides to make accretive acquisitions with the $1B+ of cash that it will have after its Wolfspeed sale closes by the end of this year."

On July 14th, German chipmaker Infineon Technologies agreed to buy Cree division Wolfspeed Power and RF for $850 million in cash.

Chin believes Cree's annual earnings per share will be lower by $0.30, once Wolfspeed is removed, and he sees another $0.11 to $0.17 per share reduction due to weaker near term industry trends.

Cree stock was down 12 percent year-to-date during Wednesday trading.

Cree year to dateSource: FactSet