Lehman report (re: semiCUBE=$33) posted on Raging Bull...
ragingbull.com
LEHMAN BROTHERS INC.
Headline: C-Cube Microsystems: C-Cube Semi Significantly Undervalued
Author: Daniel Myers (415)274-5440, Kevin Vassily (415)274-5251
Rating: 1
Company: CUBE
Country: COM CUS
Industry: SEMICO
Ticker: CUBE Rank(Old): 1-Buy Rank(New): 1-Buy
Price: $45 1/2 52wk Range: $52-17 Price Target (Old): $71
Today's Date: 12/06/99 Price Target (New): $71
Fiscal Year: DEC
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EPS 1998 1999 2000
QTR. Actual Old New Old New
1st: 0.27A 0.32A 0.32A 0.33E 0.33E
2nd: 0.25A 0.28A 0.28A 0.30E 0.30E
3rd: 0.28A 0.32A 0.32A 0.37E 0.37E
4th: 0.31A 0.37E 0.37E 0.47E 0.47E
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Year:$ 1.11A $ 1.29E $ 1.29E $ 1.48E $ 1.48E $ - -E $ - -E
Street Est.: $ 1.28E $ 1.28E $ 1.49E $ 1.49E $ 1.90E $ 1.90E
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Price (As of 12/3): $45 1/4 Revenue (1999): $405.5M
Return On Equity (99): 19.1% Proj. 5yr EPS Grth: 20.0 %
Shares Outstanding: 45.0 Mil. Dividend Yield: N/A
Mkt Capitalization: 2.04 Bil. P/E 1999; 2000 : 35.1 X; 30.4 X
Current Book Value: $7.28 /sh Convertible: YES
Debt-to-Capital: 6.7 % Disclosure(s): C, A
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Highlights:
* We believe that shares of C-Cube are undervalued, and that the current price represents a buying opportunity for investors.
* C-Cube's Semiconductor Division, which will exist as standalone company after the completion of the DiviCom sale and will generate $250M in sales in CY 2000, is currently being valued at $12 per share. A valuation in parts using comparable companies suggests a valuation of $33 for C-Cube Semi, and a total valuation of $66.
* While C-Cube Semiconductor will continue to have VCD exposure in China for the foreseeable future, we believe that the growth prospects for the company's DVD and set top box businesses will mitigate this exposure. As well, we believe that the growth prospects for its broadcast encoder business have brightened with the proposed Harmonic/DiviCom merger.
* C-Cube Semiconductor continues to have an impressive operating model, with margins near 60% in the semiconductor business. While we are projecting that margins will come down to the mid 50% range over time, we believe that C-Cube will outperform its peers in terms of profitability.
* One of C-Cube largest customers, set top box vendor Pace Micro, just won an important deployment with Time Warner. The opportunity for this deal is a minimum of 750K set top boxes, and could be much higher. While no component suppliers were announced, we believe that C-Cube has an excellent chance to participate in this opportunity.
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VALUE OF C-CUBE SEMICONDUCTOR NOT REFLECTED IN STOCK PRICE
At the close of trading Friday, shares of C-Cube were trading at $45.25. Based on the acquisition price for the DiviCom division, which is fixed at 0.5426 shares of Harmonic shares (HLIT: $61, not rated) for each share of DiviCom, DiviCom is currently valued at $33.61. This values the semiconductor division at $11.64 per share
An examination of several comparable companies suggests that C-Cube's
Semiconductor division should receive a higher valuation. By using our valuation in parts methodology, we believe current fair value for the semiconductor division is approximately $33. In order to use this
methodology, we have segmented the semiconductor business into two parts -- VCD and Growth Businesses. We believe that VCD will account for approximately 25% of total revenue in 2000, with the balance of revenue coming from the company's high growth platforms of DVD, set top box, and codecs.
For the VCD business, we use ESST as the comparable, as it C-Cube's main competitor in the Chinese VCD market. For C-Cube's high growth businesses we use two comparables, Zoran and Microchip. We chose Zoran as a technology comparable, and Microchip as a margin profile comparable. In fact, using Microchip for its margin profile is conservative, as its gross margins are well below that of C-Cube Semiconductor. The table below outlines each of the comparables on an enterprise multiple basis. When these multiples are applied to C-Cube's respective business segments, we arrive at a total share price of $33.
Table 1: Comparable Enterprise Multiples
Enterprise
Multiple CY 1999
VCD Comparable
ESS Technology 2.79
DVD STB,Codec Comparables
Zoran 8.86
Microchip 8.37
Average 8.62
Table 2: C-Cube Valuation in Parts
CY 2000 Share
SPS Price
VCD $1.14 $3.17
DVD, STB, Codecs $3.41 $29.37
Total C-Cube Semi $32.55
Plus Divicom $33.61
Total C-Cube $66.16
We believe, based on the comparables, that the current fair value for C-Cube (including DiviCom) is approximately $66, which is well above its current price of $45.
SET TOP BOX OPPORTUNITY CONTINUES TO GROW
Pace Micro, one of C-Cube major's customers in Europe, recently announced a deal with Time Warner to supply digital STB in the US. The size of the deal starts at a minimum of 750,000 units, and could be much higher. This was Pace's second win in US cable, and is continuing evidence of the weakening of the STB duopoly that General Instrument and Scientific Atlanta held in the US.
Best case scenario for C-Cube is that they participate directly in this deployment by supplying Pace STB decoders, and as one of the biggest suppliers of STB decoders to Pace, we believe they have an excellent chance to participate. However, the continuing emergence of third party STB suppliers in the US market (Phillips, Sony, Pace) is important in and of itself, and will only lead to increased opportunity for C-Cube.
BUSINESS DESCRIPTION: C-Cube is a leader in digital video compression
technology, the core technology enabler for the emerging revolution in digital video.
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Disclosure Legend: A-Lehman Brothers Inc. managed or co-managed within the past three years a public offering of securities for this company. B-An employee of Lehman Brothers Inc. is a director of this company. C-Lehman Brothers Inc. makes a market in the securities of this company. G-The Lehman Brothers analyst who covers this company also has position in its securities.
This document is for information purposes only. We do not represent that this information is complete or accurate. All opinions are subject to change. The securities mentioned may not be eligible for sale in some states or countries. This document has been prepared by Lehman Brothers Inc., Members SIPC, on behalf of Lehman Brothers International (Europe), which is regulated by the SFA. ] |
