(Cree earnings outlook story update for Gabelli outlook, gross margin estimates, Canaccord LED market outlook)

NEW YORK ( TheStreet) -- Shares of LED bellwether Cree ( CREE - Get Report) continued down to yet another new 52-week low during trading on Thursday, as one more bearish CREE earnings outlook was released. Trading in Cree shares was elevated for the second straight day, and Cree shares traded as low as $40.44 on Thursday morning, though by the afternoon the 52-week low level for Cree was at $40.70.

Cree announced on Tuesday that it will report its earnings next Tuesday, April 19. The Cree earnings preview game from Wall Street has begun, and one Cree earnings preview report out on Wednesday from long-time Cree bear Brigantine Advisors was pointed to as one factor further pressuring Cree shares.

On Thursday, Gabelli Securities, another Cree bear, released its earnings preview and predicted continued gross margin compression for Cree into 2012.

Cree shares have declined to a series of new 52-week lows since March 22, when the LED company lowered its guidance for the upcoming quarterly results, the latest in a string of earnings disappointments for Cree. Cree has trended down in trading every day this week; even though it's seen a succession of new 52-week lows, there has been no buy on the weakness ahead of earnings.

Brigantine Advisors analyst Ramesh Misra, who first went to a sell on Cree in January 2010 -- one quarter before the company began reporting a series of earnings disappointments -- said on Wednesday morning that conditions will remain weak in the LED space for the next 18 months to 24 months.

Cree shares declined by 4% on Wednesday. On Thursday, Cree shares declined by another 1%

Brigantine's Misra said that he's not taking credit for the latest Cree decline, and believes it's a combination of the fact that the company announced the date for its next earnings and Wall Street overall needing to be more conservative with Cree earnings previews given the string of recent financial misses.

The Brigantine analyst's Cree preview more or less makes the case that Cree has now set the bar so low that it won't miss when it reports, but that doesn't mean that conditions are improving in the LED market.

"After recently pre-announcing lower than originally expected results for fQ3'11(March), we think there are likely to be few surprises when Cree reports actual results next week and numbers could possibly come at the upper end of the new guidance as management may have sought to set the bar low.... We believe the outlook for LED pricing over the next 18-24 months remains negative, as global production volumes will continue to expand vigorously as the new production tools are brought online, followed by continuous yield improvement. Despite the 35% decline in the stock since the beginning of the year, Cree is still expensive at 25x our CY11 EPS estimate," Misra wrote.

Morgan Stanley recently downgraded Cree to a sell in what Brigantine's Misra said was an indication of how even the bulge bracket firms are beginning to backtrack from Cree bullishness that has dominated the research universe.

Several Wall Street analysts who remain more constructive on Cree shares have told TheStreet that more so than ever before Cree management credibility is on the line with its upcoming earnings and guidance.

Misra didn't only predict that the LED market will remain under pressure for much longer than bulls anticipate, but also predicts that Cree's outlook for the June quarter is likely to be cautious, especially for gross margins, which has always been a trigger point for investors in the high-growth business and with premium priced stocks. "Management already suggested that June quarter revenues are expected to rise about 10%-12% sequentially after falling about 15% Q/Q in March. We expect margins will likely fall again, due to continuing pricing pressure and lowered production levels," the Brigantine analyst wrote.

Gabelli Securities lowered its gross margin projection estimates on Cree based on the pricing pressure, inventory correction, and potential for gross margin deterioration due to weak market.

"We also think we may see a longer delay in the completion of the new China street lighting technical specification requirement. Furthermore, we belief that the Chinese government will shift its LED lighting subsidy from MOCVD equipments to downstream LED lighting products, i.e. LED components and LED lighting products. Consequently, we expect to see more downstream LED lighting investment, new players emerging in China, and intensifying LED lighting competition. Hong Kong and China generated 40% of CREE's FY2010 revenue and we expect more competition to drive incremental pricing pressure in China," Gabelli analyst Hendi Sussanto argued.

For the fiscal third quarter 2011, to be reported on April 19, Gabelli expects gross margins of 41.5%, versus the previous target of 43% gross margins.

For the fiscal fourth quarter 2011, Gabelli projects gross margins of 40%, versus a previous target of 43.5%.

For fiscal 2012, Gabelli estimates Cree gross margin of 39%, versus a previous forecast of 43.5%.

Alluding to Cree's June revenue guidance, Harsh Kumar of Morgan Keegan said, "Cree's anticipation that revenue will expand in the June quarter means that even in tough times they are able to move product, but if they fall shy then that may be last straw in terms of credibility." The Morgan Keegan analyst, however, remains bullish on Cree shares from current their current level.

Brigantine's Misra said there has been no "eureka" moment for his Cree bearishness. "It's not about now versus two months ago. The new 52-week low today is what's happening when more analysts get more cautious on Cree."

SemiLEDs ( LEDS - Get Report) a niche player in the LED space which reported its second straight earnings miss since going public on the same day that Morgan Stanley downgraded Cree, was also down every day this week and on Thursday, hit a new 52-week low of $10.75. SemiLEDs shares have declined by 62% year-to-date.

Canaccord Genuity downgraded SemiLEDS from a buy to a hold with an $11 price target on Wednesday.

In lowering SemiLEDs to a hold from a buy -- even after shares tanked by 62% this year -- Canaccord Genuity wrote, "While shares appear washed out, more aggressive pricing, high inventory and de-levering risk cause us to move to the sidelines until visibility returns."

Canaccord Genuity analysts pointed to similar LED industry issues for SemiLEDs and Cree, even if the companies' businesses are very different.

"Following the completion of our Asian tour, meetings with Epistar and other diligence calls with tier-1 component suppliers over the past week, we conclude that visibility into SemiLEDs' end markets remains weak and that the company may have further near-term disappointments as a result of this difficult environment."

Canaccord wrote about pressure specific to SemiLEDs in saying, "We believe there is currently a large demand gap in China, SemiLED's largest market, as well as increasing competition amid a growing oversupply of LED chips and components not only in Taiwan and China but worldwide. Commentary from management of pricing pressure, low utilization and an inventory build on its two-day roadshow leave us more concerned about the margin structure and loss of earnings power."

Yet Canaccord also included bearish LED structural commentary, writing, "As we have written extensively this week, we believe chip/component plays may be on the verge of a negative structural shift in their margin structure as the market becomes saturated with excess capacity and as market share wars develop."

-- Written by Eric Rosenbaum from New York.


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