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Saturday, April 22, 2006

Cree's Big Slowdown

Cree (NASD:CREE) makes LED chips for devices like cellphones, camera flashes and car dashboards. The company claims that its lead in this field is due to "unrivaled materials expertise in silicon carbide (SiC) with gallium nitride (GaN) to deliver chips and packaged devices that can handle more power in a smaller space while producing less heat than other available technologies, materials and products". Cree's market has grow quickly. In the fiscal year ending June 30, 2003, the company's revenue was $230 million. In the fiscal year 2005, the number jumped to $389 million. Over that period, net income almost tripled to $91.1 million.

As the company moved into its current fiscal year, growth slowed considerably. In the June 05 quarter, revenue was $98.9 million. The September 2005 quarter revenue was $103.9 million and for the December 2005 quarter, the top line barely moved up to $104.7 million. Net income for this last quarter was $17.8 million, the lowest of the calendar quarters in 2005.

Oddly enough, the stock price at Cree does not seem to reflect the slowdown. As The Motley Fool (www.fool.com) pointed out recently, Japan-based Nichia has about 80% of the LCD backlight market, which is one that is critical to Cree. But even with this kind of competition, the stock has kept up its run. After dropping to $21.68 in October 05, it moved up to $31.30 fairly recently, a 63% rise in a short time.

Cree recently demonstrated that its growth record is in real trouble.

For the fiscal third quarter, ending March 26, 2006, revenue rose only 2% from the immediately previous quarter, to $107.7 million. Net income was $24 million.

Guidance was for insignificant growth. The current quarter will only be in the $106 to $110 million range. The company said this was due in part to relocation of some production facilities.

Given the significant slowing of Cree's business, the market reaction was surprisingly muted. The stock dropped less than 11% to $30.40. In other words, it still trades 40% above its 52-week low late last year.

The company has really given no adequate reason for the flattening of its revenue and income, which is now no longer the exception, but the rule.

With the stock still trading at 6.4 times sales according to Yahoo!Finance, one has to wonder why it is not closer to $20 than $30.

Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He is also the former president of Switchboard.com, which was the 10th most visited site in the world at the time, according to MediaMetrix. He has been chief executive of FutureSource LLC and On2 Technologies, Inc. and has served on the boards of TheStreet.com and Edgar Online. He does not own securities in companies he writes about. He can be reached at douglasamcintyre@gmail.com.
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