Cree hammered on warning, downgrades

Chipmaker Cree saw its stock lose over a quarter of its value after the company said that fourth-quarter earnings will fall short of estimates, citing an increasingly competitive and slowing market for LED chips. Analysts reacted with a flurry of downgrades.

Shares of the company fell $6.50 to $18.94, a new 52-week low, at the opening bell Thursday. Cree (Nasdaq: CREE) manufactures silicon carbide (SiC), semiconductor wafers and devices. These devices include LEDs (light-emitting diodes) used in wireless handsets and other consumer products.

After Wednesday's market close, the company warned that it expects fourth-quarter earnings of 14 cents to 16 cents a share, with revenue of about $45 million to $48 million--a 10 percent to 15 percent sequential drop.

However, the company said that it remains on track to meet its third-quarter targets of earnings of 18 cents a share on revenue of $52 million.

For fiscal 2002, the company said that if macroeconomic conditions improve and the company's LED product pipeline clears up, sequential growth could resume in the second quarter of 2002. Assuming these conditions, the company projects revenue of between $200 million and $240 million, with earnings coming in flat to 20 percent higher year-over-year.

Analysts handed out tough medicine on the news. The stock was downgraded from "buy" to "market perform" at First Union Securities, Wit SoundView lowered its rating from "strong buy" to "buy", and Stephens Inc., cut the stock from "market outperform" to "buy".

John Lau at Wit Soundview also lowered estimates for fiscal 2001 and 2002. The analyst wrote that while he believes Cree remains a leader in silicon carbide-based LEDs, he would remain on the sidelines until there is evidence of a re-acceleration in demand.

Similar concerns were raised by analyst Hans Mosesmann at Prudential Securities. The analyst maintained a "hold" rating on the stock, while cutting fiscal 2001 and 2002 targets and lowering his price target from $28 to $20.

"We still remain concerned with [average selling price] erosion over the next several quarters because a lot of LED capacity is emerging," Mosesmann wrote in a research note. "We are also concerned about Cree's internal cost reductions which have not lived up to their goals and could be a problem if [average selling prices] fall faster than expected."