cree upgrade:
CREE, INC. FYJune EPS Prior Est.
CREE @ $103.00
Rating: BUY 99A $0.53
Price Target (12 mo.): $175 00E 0.87 $0.73
Todd Cooper (501)-377-2503 01E 1.34 1.00
Raising Rating to BUY and Price Target to $175 Following Exceptional Quarter
Cree reported 3Q00 EPS of $0.26, which was $0.06 higher than the consensus estimate. Earnings
increased 44% sequentially and 117% year over year. Cree's high-brightness (HB) LEDs continue to
be the main driver behind revenue and earnings growth.
Cree's 3Q00 revenue of $28.4 million was approximately $2.8 million greater than what we were
projecting. The revenue result was a 19% sequential increase and a 77% increase over 3Q99.
Cree's HB LED chip volume nearly doubled and revenue increased 66% over 2Q00. The HB LEDs
now account for 80% of total LED revenue versus 11% in the year-ago period. Cree's LED average
selling prices (ASPs) increased 10% due to the increased mix of HB LEDs.
The Company's 3Q00 gross margin also came in well above our estimate of 53.0% at approximately
56.9%. This was a significant increase compared to 2Q00's gross margin of 53.2%. The main factor
in the improvement was again due to the increasing mix of HB LED's in Cree's revenue stream.
Additionally, Cree was able to reduce the average product cost of its HB LEDs 10% sequentially and
44% since June 1999. The Company is well on its way to reducing chip costs by 50% in the current
fiscal year.
One of the main factors that enabled Cree to post such strong financial results was its ability to
increase the throughput in the epitaxial process. The epitaxial process, or the layering of materials
on to Cree's silicon carbide substrate, has been the bottleneck in the manufacturing process. The
Company's engineers once again met the challenge of increasing throughput to keep up with demand.
After being disappointed with last quarter's progress on commercializing a silicon carbide
RF/Microwave product, we are now slightly more optimistic.
In the third quarter, Cree was able to
overcome nagging production issues and is now filling customer samples to be shipped in the fourth
quarter. We expect to see credible revenues from this line in the first half of FY01.
Due to the improvements in Cree's epitaxial production, continued strong demand for its LED wafers
and improved outlook for it RF/Microwave product line, we are raising our FY00 EPS estimate to
$0.87 from $0.73 and our FY01 EPS estimate to $1.34 from $1.00. We are also increasing our 12-
month price target to $175 from $90. We arrived at the $175 price target by using a multiple of 100x
our second twelve-month EPS estimate of $1.75. While this P/E multiple may seem excessive, we
believe the potential of the yet untapped markets that Cree is pursuing (i.e., RF/Microwave, solid
state devices for high voltage transmissions lines and blue lasers) justifies our excitement.
We are raising our rating to BUY from MARKET OUTPERFORMER. |
