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Strategies & Market Trends : Gorilla and King Portfolio Candidates

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To: Pirah Naman who wrote (35650)	11/29/2000 2:13:22 PM
From: Stu R	Read Replies (3) of 54805

<<Cree has throughout its history been free cash flow negative, and accordingly, has yet to make any true profit, despite reporting earnings. If a person owned this company outright, they would be having to raise money outside to keep the company in business. Also, it looks like Cree is at least a year or two away from becoming free cash flow positive.>> Your post got me curious so I checked out the Cree 10K. cree.com Cash flow statement is on page 32. The way I read it is that the company has been cash flow positive for the past three years based on its cash flow from operations. It is true that if you reduce the cash flow from operations by the amount of capital purchases it does result in an overall negative cash flow. However, the overall negative cash flow has amounted to about $20 million for each of the last two years. Compare this to the $300+ million in cash and the fact the company has no long term debt. This indicates to me a very financially stable company that is expanding at a modest pace relative to its financial resources. I think that the cash flow from operations is the most important element of the cash flow statement because it points to the fundamental health of the company. A company can only function for so long without positive cash flow from operations. However, a company can function and thrive for a long, long time if it has positive cash flow from operations, even if it uses all of it and then some to expand its operations. As in Cree's case this can occur because it has the resources to do so. I do not follow Cree that closely, so my points are made just from reviewing the financial statements. What I would like to know from those more familiar with Cree is what is its expansion plans? Why are they not expanding more rapidly given its high profitability and adequate financial resources? On the surface the company appears very well positioned financially with potential for continued strong growth. Unfortunately, to dig beneath the surface to make a judgment on the issue of related party transactions is beyond my reach at the moment but would be an important part of a due diligence effort. Stu

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