<I have no idea of how you came up with the $30k revenue>
Since CREE's asset turnover (sales / assets) is 0.30, I assumed that with $100k of assets, they were able to generate $30k in revenues.
I was trying to illustrate how CREE's usage of its assets was not optimal, and should (can it?) be expanded (beyond 0.30) for better ROE.
With additional investments required in the near future for manufacturing expansion, CREE's ROE is not likely to expand much beyond their heydays of 1998 and 1999 when they were generating their best ROEs of around 17%.
<The company has operating leverage, which is far more important than financial leverage>
With such low asset turnover figures, I very much doubt that CREE has much operating leverage. Substantial resources are being "tied up" in the company but are not translating into increased sales (yet). The reality is that 99% of CREE's revenues in recent years has been in LEDs, and NOT in the rectifier, power amp and blue laser products, touted to be the next "hot" products.
However, one of the positives is that CREE achieved these ROEs without resorting to any significant financial leverage. By staying away from debt, they are being conservative - thus the "quality" of earnings is very good.
As a "manufacturing company", CREE has not yet demonstrated that they are substantially more profitable or productive than the "above average" business.
As investors, we have to be aware that valuations for "sexy" companies like CREE are in the stratosphere precisely because of the PERCEPTION that its products are somehow unique. In today's markets, we should really think hard whether or not these valuations are sustainable and realistic.
IMO, CREE's products do NOT have a defensible competitive advantage. Sapphire substrate LEDs are every bit as good as SiC substrate LEDs, and there is no compelling reason why buyer will not switch to competing products if the requirements of price, availability, and reliability is met.
One characteristic or SiC substrate LEDs which is not well publicized is that they require a higher forward voltage than sapphire equivalents. For low voltage applications, sapphire has the edge.
Also, blue lasers have been developed by a whole bunch of other Japanese companies, and the growth has been stymied by the adoption of an alternative red laser standard by the DVD consortium. The achilles heel was that blue laser is not backwardly compatible with existing DVDs, whereas phase-split short wavelength red laser can cater to BOTH current and future HD DVD standards.
CREE's ability to maintain its competitive position will be undermined by a tidal wave of copycat products coming out of Korea, Taiwan, and China during the next few years, particularly if these countries are able to refine their products to meet the reliablity requirements of the global blue chip industrial buyers.
FYI, here are CREE's ROE components for the past five years (ignoring tax and interest costs). The math is simple: EBIT margin x Asset turnover x Financial leverage
Year//%ROE(=)EBIT(x)AssetTurn(x)FinLev
98 // 17.25(=) 20.33(x) 0.69(x) 1.23
99 // 17.40(=) 25.87(x) 0.57(x) 1.18
00 // 12.20(=) 33.85(x) 0.34(x) 1.06
01 // 9.83(=) 29.25(x) 0.32(x) 1.05
02 // 0.55(=) 1.90(x) 0.28(x) 1.04
Just for kicks, I want to make a forecast for the next fiscal year's numbers to be:
03 // 2.60(=) 10.00(x) 0.25(x) 1.04
I belive that CREE's revenue mix will not change substantially, with 99% of revenues still being LED-based.
The rate of increase in revenues will slow down due to competitive substitution + pricing competition, and margins will be flat to down, as CREE is not able to increase their manufacturing efficiencies.
With ROE of 2.6%, and slowing revenue growth, CREE may not exactly be a great investment... |
