We are raising our price target to $78 [from $55] and increasing our estimates.

Our recent distributor channel checks indicate that light-emitting diode (LED) volumes are at the high end of expectations for general and specialty lighting applications. We expect demand will continue to be strong entering 2011 and that an improved climate for LED investment should start to drive higher multiples.

Cree (ticker: CREE) shares are up 46% since we initiated in October and we believe shares will continue to outperform as consensus estimates increase. We maintain our Above Average rating.

Distributor channel checks indicate strong demand in the calendar fourth-quarter. Our checks with distributors in China and Taiwan indicate strong demand for LED chips used for general lighting applications.

We think seasonal demand and strong growth from new applications are behind the positive sentiment that we detect among distributors.

LED for backlighting applications also remain strong and is keeping pricing erosion in check in the near term. We expect the momentum will continue into the calendar first quarter and we expect first-quarter distributor volumes will be above normal seasonal.

Evolving China policies regarding LED subsidies are creating noise, but the overall impact is positive. Recent news points to changes in Chinese subsidies for metal organic chemical vapor deposition (MOCVD) tools used in LED manufacturing.

We expect the changes will entail lower equipment subsidies for Chinese LED manufacturers, which in turn should mitigate over-supply concerns. We do not think the lower subsidies reflect any change to China's plans to implement LED lighting for Tier 2 and Tier 3 cities and we still expect that China will be the fastest-growing market for LED general lighting in 2011.

Our new fiscal 2011 sales and earnings-per-share estimates are $1.175 billion and $2.50, respectively, from $1.150 billion and $2.42, repsectively. The consensus 2011 sales and EPS estimates are $1.140 billion and $2.36, respectively.

Our new fiscal 2012 sales and EPS estimates are $1.440 billion and $2.98, respectively, from $1.385 billion and $2.74, respectively.

We are maintaining our Above Average rating and increasing the price target to $78. Cree shares are trading at 23.9 times our calendar 2011 EPS estimate of $2.84 and our price target is based on a forward price-to-earnings (P/E) multiple of 29.5 times.

We are raising our multiple to the median value that Cree shares traded at through 2009 as we think more favorable tax and environmental policies should be catalysts for LED lighting growth.