From Notable Calls:
Cree Inc (NASDAQ:CREE): Market Likely Overestimates Earnings Power, Cut to Underweight - Morgan Stanley
Morgan Stanley is out making a significant LED lighting call this morning downgrading the sector leader Cree Inc (NASDAQ:CREE) to Underweight from Equal-Weight with a $36 price target (prev.NA).
Firm is cutting their estimates way below consensus noting they cannot recommend the stock today as a way to play the secular growth theme.
The stock is down 40% since July 2010, following four successive disappointments in earnings or guidance. At 25x 2011 earnings, valuation is nearly twice the market multiple, but Morgan Stanley forecasts only 4% EPS growth in 2011 and –5% in 2012. They believe lower ASPs, lower gross margins, and lower market share will offset strong industry volume growth in LED lighting. They are lowering their F2012 estimate by 29% and are 17% below consensus. Firm's $36 target implies 21% downside.
Four reasons for Underweight rating:
1) Competition and pricing pressure. More companies have the technology and IP to produce and sell lighting-class LEDs and are pricing aggressively,especially for higher-volume products.
Channel checks indicate that at least one top tier producer plans to sell lighting class LEDs at $7/klm by the end of calendar 2011. Epistar has targeted even lower pricing of $4/klm. Although Epistar has not been in the top tier of manufacturer for lighting class LEDs, a recent joint venture with Toyoda Gosei provides access to patents that will help it address the lighting market. Cree’s ASPs vary widely across products, but Morgan Stanley believes they currently average over $12/klm.
Even if Cree maintains a 15% price premium to the competitor at $7/klm, that would imply a 33% price drop from our current estimate of $12/klm. If Cree cannot maintain a price premium, $7/klm would imply a 43% price drop....MORE
...Notablecalls: The call is a must read for every LED sector investor (42 pages long). Morgan Stanley paints a fairly bright picture for the sector as a whole but not so pretty for Cree (CREE).
Cree's market share appear to be unsustainable & with declining ASP's raising volumes aren't going to help that much.
I would call it a big change of heart by Morgan Stanley's team. They used to be so bullish. Now their price target is the new Street low.
To make things worse, take a look at what Semileds (NASDAQ:LEDS) had to say this morning. Cree's Chinese kid brother literally shit the bed. They almost halved their guidance blaming competitive pricing environment and their decision to preserve their market share. This does not read well for the industry. Remember, it was Semileds that acted as the canary in the coal mine in January. Looks like things may have worsened from there.
I wonder if CREE breaks the $43 level today?