Lehman on C-Cube, posted by whiteP on Raging Bull...
ragingbull.com
06:15am EDT 15-May-00 Lehman Brothers
(Daniel Myers (415)274-5440) CUBED HLIT
C-Cube Microsystems: How can this be so cheap?
Ticker : CUBED Rank(Old): 1-Buy Rank(New): 1-Buy
Price : $18 52wk Range: N/A Price Target (Old): $31
Today's Date : 05/15/00 Price Target (New): $31
Fiscal Year : DEC
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EPS 1999 2000 2001
QTR. Actual Old New Old New
1st: 0.32A 0.14A 0.14A - -E 0.12E
2nd: 0.28A 0.10E 0.09E - -E 0.12E
3rd: 0.32A 0.12E 0.10E - -E 0.16E
4th: 0.40A 0.14E 0.14E - -E 0.19E
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Year: $ 1.30A $ 0.50E $ 0.48E $ - -E $ 0.59E
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Price (As of 5/12): $18 Revenue (00): $255MM
Return On Equity (00): N/A Proj. 5yr EPS Grth: 20.0 %
Shares Outstanding: 56.5 Mil. Dividend Yield: N/A
Mkt Capitalization: 1.02 Bil. P/E 2000; 2001 : 37.5 X; 30.5
Current Book Value: N/A Convertible: None
Debt-to-Capital: N/A Disclosure(s): C, A
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Highlights:
* We view the current C-Cube valuation as unsustainably low
for a number of reasons: 1) It is trading below nearly
every other semiconductor company on a price/sales
multiple, 2) The downward pressure of arbitrageurs
unwinding will probably stop in the very near future, 3) At
these levels, C-Cube is a potential takeover target for a
number of large semiconductor companies.
* C-Cube has two main pieces to the story: 1) The expansion
platform which is growing at about 40%/year, and 2) The
legacy VCD business which is shrinking at about 25%/year.
The mix has already crossed over to be dominated by the
expansion platforms at more than 70% of total revenue.
* Inside the expansion platform are high-growth digital
video end markets. These include DVD, set-top boxes, and
CODECs. We believe that these product lines will roll out
in the following sequence: DVD, STB, and then CODEC.
* At 3.92 times our calendar 2000 estimated sales, C-Cube
is the cheapest semiconductor company that we follow. With
gross margin of 55%, we believe that a revenue multiple of
6x to 7x is more appropriate. This implies a one-year price
target of $31 to $36 on our sales/share estimate of $5.22
in 2001.
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TRANSACTION SUMMARY
C-Cube recently merged the Divicom division into Harmonic
Inc. (HLIT) and spun off the semiconductor division to the
public. As usual, the semiconductor equity has traded
downward during the redistribution period from the current
shareholder base into a new shareholder base. We believe
that the stock still remains depressed and represents both
a short-term and long-term undervalued equity.
INCOME STATEMENT
Our projections are as follows:
Q1A Q2E Q3E Q4E 2000E 2001E
Revenue ($MM) 61.0 58.0 63.7 72.0 254.7 306.6
EPS 0.19 0.09 0.10 0.14 0.48 0.59
Broadcast ($MM) 59.9
STB ($MM) 65.8
DVD ($MM) 55.2
VCD ($MM) 74.7
We estimate that the combination of broadcast, STB, and DVD
are growing at 45%-50% in 2000 while the VCD business is
declining at a rate of 20%-25% per year. We project that in
2001, VCD will only be 15% of revenue and the expansion
platform will be the balance at 85%.
VALUATION
The lack of directly comparable companies makes it
difficult to construct a tight valuation analysis. The only
other publicly traded companies in digital video are Zoran
(ZRAN, $44, Not rated) and ESS Technology (ESST, $12,
Not rated). However, the technology breadth of both of
these companies is well below C-Cube's. Therefore, we
believe that C-Cube should trade at a significant premium
to these companies. Zoran is trading at approximately 7
times 2000 sales and ESST is trading at about 1.5 times
2000 sales. If we apply these multiples to C-Cube's
respective businesses in 2001 (ZRAN multiple to the
expansion platform and ESST's multiple to VCD) we arrive at
a blended multiple of 6.2. Because C-Cube's profitability
is much higher than ESST's in VCD, we use the range of 6x
to 7x.
FINAL TAX SITUATION
The final taxes owed by C-Cube were determined by the stock
price on the first day of trading. At one point last week,
the tax bill was projected to be quite large which implied
that the company might have to do a financing in order to
fund it. In actuality, the final tax bill was quite small
and the company was able to finance it with existing banks.
The net cash position will be $5MM of debt comprised of
about $40MM of debt and $35MM in cash on the balance sheet.
Assuming that the company performs to our projections, we
project that it will generate in the range of $5MM-
$10MM/quarter. At this rate, we expect that the debt pay-
down should be rapid.
BUSINESS DESCRIPTION: C-Cube is a leader in digital video
compression technology, the core technology enabler for the
emerging revolution in digital video. |
