Anybody know why this stock is heading south?
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Why Some Investors Wonder If C3 Will Continue to Sparkle for Cree Research
By Herb Greenberg
Senior Columnist
7/29/99 6:30 AM ET
Nobody at Cree Research (CREE:Nasdaq) or C3 (CTHR:Nasdaq) is hiding the ties that bind: CEOs
of the companies are brothers. Cree makes silicon carbide, which is used in high-tech electronics;
another one of its products, silicon carbide crystals, are used to make fake gems. C3 makes fake
gems, and Cree has agreed to sell its crystals to nobody but C3.
It has been good business for both sides, but especially good for Cree, which has told Wall Street
that C3 accounts for between 15% to 20% of sales.
That's the good news.
And now the bad news:
When one company accounts for that much of your revenue, its biz had better be good. And while it
was an improvement over a year ago, C3's latest quarter sparked concerns among some Cree
investors when compared with the prior quarter. While second-quarter sales rose just 10% from the
first quarter (roughly half of what the company itself had projected) C3's inventories leaped by 46%.
What's more, C3 isn't yet profitable and it isn't even hinting at when it will be.
Still, C3 pointed to ballooning gross margins, thanks to better yields of fake gems from Cree's
crystals.
And therein lies the possible problem: If C3's sales growth is below its own estimates and its
inventories are rising and it's getting more gems from each crystal, won't it have to cut back on its
purchases from Cree? And why, one short-seller wonders, isn't C3 talking about profitability, now
that its gross margins are a fat 54%?
Cree officials couldn't be reached, but a C3 spokeswoman said her company isn't worried about the
high margins and sales shortfall because the company expects to be selling to 500 retail stores by
the end of the year; that compares with about 180 stores now. She adds that orders are expected to
rise from existing stores as the holidays approach.
For Cree's sake, she had better be right. With a stock that has zoomed to yesterday's close of 69
3/4 from a 52-week low of 10 1/2 and a market cap of $1 billion -- roughly 17 times sales and 80
times trailing earnings -- investors aren't likely to look kindly on a sudden slowdown in demand from
one of its largest customers.
And this note: Long-term, this isn't likely to be a problem for Cree, whose principal market may be
poised to eventually boom. But short-term, "it's a valid issue," says analyst J.D. Abouchar, of
Preferred Capital Markets, who downgraded the stock two weeks ago, citing its price.
In this market, unfortunately for Cree, short term is what counts. |
