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No. of Recommendations: 5
boad writes:
"Cree (CREE) is the one that had the good earnings but warned that the margins will level off. DO not expect too much more growth from it. I think Cree is a pretty good stock. I would nibble on it right now. It should recover soon."


IMO Navellier's first statement was somewhat of a distortion. CREE issued conservative guideance that margins would remain unchanged, which leaves the possibility of an upside surprise just like last quarter.


Isn't there a confusion here between gros margins and earnings growth? Also, implies CREE is a mature business ...


Gross margins directly impact EPS, and the only way you can offset falling margins is to have a dramatic decrease in operating expenses. Even so, to have margins decrease even once raises serious questions about operational decisions, and clouds the future of earnings per share numbers.

Changing margins is always a concern in a growth company that is introducing new product lines. Let's say a company with 50% gross margins introduces a hot new product with high demand. The new product may be a hot seller, sure. But if the costs to make and sell the product are 30% of the gross revenue, you've possibly pulled down your gross margins to 40% a share, which could well pull your earning per share down by 20%.

If your margins have been rising for some time now and management goes out of its way to ask you not to expect this the following quarter, you need to ask yourself why that is. In CREE's case, we know they've put tremendous capability into capacity expansion to meet a real backlog. Furthermore, they've been retooling to mass produce the 3" wafers.

Honestly I'm surprised that these efforts haven't yet put a dent in margins. But I don't worry about it for 2 reasons: I know these expenses are needed to pull down revenue that is just waiting to be reaped, and the expansion costs are one-time expenses that should yield the same or greater efficiencies as present fabrication factilities.
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