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Cree falls after Morgan Stanley downgrades stock

December 8, 2011
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SAN FRANCISCO—Shares of LED lighting and chip-maker Cree Inc. fell Thursday after it a Morgan Stanley analyst downgraded the stock, saying investor expectations for fiscal 2013 are too high.

THE SPARK: In a Thursday client note, Morgan Stanley analyst Joshua Paradise reduced his rating for the stock to "Equal Weight" from "Overweight," saying the weak economy may slow adoption of pricier LED lights and the company's production transition may be delayed because there's too much factory capacity.

THE BACKGROUND: Cree makes light-emitting diode (LED) lighting and chips. Its products are used in autos, video screens and indoor and outdoor lighting. LED lights are increasingly popular for their durability and energy-saving capabilities.

An industry oversupply is one reason Cree's shares have dropped more than 60 percent this year.

THE OPINION: Paradise noted that Cree's lighting products are being adopted by companies, but he said analysts' estimates for the year ending June 2013 are too optimistic. Analysts polled by FactSet expect $1.75 per share; Paradise cut his estimate to $1.07 per share from $1.12 per share.

He added that Cree's chip sales have declined 50 percent in the last six quarters, and now make up less than 10 percent of the company's revenue. This could hurt Cree's margins, he said.

And the analyst said the company's low factory utilization could slow down Cree's move toward making 150 mm wafers, which he had been expecting would reduce the company's costs next year.

Cree spokeswoman Michelle Murray said the company declined to comment.

SHARE ACTION: Cree shares fell $2.05, or 8 percent, to finish trading at $23.50. The shares rose a penny in after-hours trading.

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