Analyst slams LED maker Cree

Even with the Nasdaq as a whole down 9 percent, Durham, N.C.-based Cree (Nasdaq:CREE) saw its shares fall 14.6 percent today to $22 on an analyst report warning of problems at the light-emitting diode market leader.

Canaccord Adams released a report today reiterating a ‘sell’ rating and target price for Cree of $16, which is 20 times the estimated 2009 earnings-per-share of 68 cents.

Canaccord Adams' report called the research "yet another red flag" for investors. Cree officials declined to comment.

"While you see Cree's XLamp business is doing better, we think the fundamentals of the company have actually eroded," Canaccord Adams Principal Senior Analyst Jonathan Dorsheimer told the Cleantech Group.

Dorsheimer said the concern arose last week as he visited Cree distributors in Korea. Cree's largest customer, which he declined to name, had excess inventory of about $10 million of chips that are off-spec and probably cannot be sold, Dorsheimer said. That distributor accounts for 13 percent of Cree’s sales.

"We believe the customer is working to return the product back to Cree, so it's our belief that the risk profile for Cree has increased yet again," said Dorsheimer, who has been following Cree for five years.

Even if the distributor keeps the product, Dorsheimer said, Cree's sales in the fourth quarter could suffer because fewer orders would be placed.

The news comes as the sector leaders face increased competition, Dorsheimer said.

"The market is definitely slowing," he said. "There's overcapacity in the LED industry, and we’re seeing a general slowdown."

The Canaccord Adams report blamed Cree’s "aggressive accounting strategies" for the impressive growth rates that Cree has reported. Those strategies include allegations of counting shipments to distributors as sales, capitalizing expenses associated with related-party sales, inventory write-offs, changing the useful asset life of equipment, and reserve adjustments.

The report also said inventory could be accumulating at Cree’s other distributors, a number of which have been added in September. Cree has said it added Premier Farnell (LSE:PFL.L) as a distributor and expanded its relationship with Thief River Falls, Minn.-based Digi-Key.

The news will have a negative impact on Cree’s shares, the report speculated. But because Cree recognizes revenue on a sell-in basis, the report said, Cree will likely meet its September quarter sales of $138 million to $142 million.

Meanwhile, a report by an Oppenheimer & Co. analyst on Sept. 19 upgraded Cree from 'perform' to ‘outperform’ because it said Cree’s LEDs are becoming mainstream technology. The report gave Cree a target price of $31, or 52 times the 2009 earnings-per-share.

Cree’s stock has traded between $17.10 and $35.50 over the past year, with its high price coming a few weeks after announcing plans to acquire LED Lighting Fixtures for about $77 million in cash and stock (see LED maker Cree's light brightens with acquisition).

Cree was one of the standout cleantech stocks in 2007, with its price increasing 59 percent thanks to commercial acceptance and technology advances in the LED sector (see Behind the banner cleantech returns of 2007).

Cree sells recessed LED down lights, lighting-class power LEDs, high-brightness LEDs, blue and green LED chips, power-switching devices and radio-frequency/wireless devices.