Lehman's report y'all...
08:34am EDT 12-Jun-98 Lehman Brothers ( M. A. Gumport, CFA
1(212)526-536) CUBE C-Cube Microsystems: 19% Drop Looks Like an Opportunity, But...
Ticker : CUBE Rank(Prev): 2-Outperform Rank(Curr):
2-Outperform
Price : $15.69 52wk Range: $35.00-15.69 Price Target: $27
Today's Date : 06/12/98
Fiscal Year : DEC
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EPS 1997 1998 1999 2000
QTR. Actual Prev. Curr. Prev. Curr. Prev.
Curr.
1st: 0.40A 0.27A 0.27A 0.30E 0.30E 0.40E
0.40E
2nd: 0.21A 0.21E 0.21E 0.30E 0.30E 0.40E
0.40E
3rd: 0.25A 0.27E 0.27E 0.39E 0.39E 0.44E
0.44E
4th: 0.30A 0.35E 0.35E 0.46E 0.46E 0.51E
0.51E
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Year:$ 1.15A $ 1.10E $ 1.10E $ 1.45E $ 1.45E $ 1.75E $
1.75E
Street Est.: $ 1.09E $ 1.15E $ 1.35E $ 1.43E $ -.--E $
-.--E
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Revenue (1998E): 374.1 Mil.
Return On Equity*(97): 14.2 % Proj. 3yr EPS Grth: 20.0 %
Shares Outstanding*: 41.1 Mil. Dividend Yield: N/A
Mkt Capitalization*: 644.8 Mil. P/E 1998; 1999 : 14.3 X;
10.8 X
Current Book Value*:$6.71/sh; 2.3X Convertible: YES
Debt-to-Capital*: 0.3 % Disclosure(s): C, A
* Includes convertibles in equity ($86.3 mil.) and shares outstanding.
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** CUBE PLUNGES 19% ON ABSENCE OF NEWS. DISCUSSIONS WITH MANAGEMENT
SUGGEST OUR ESTIMATES ARE CONSERVATIVE. EXPECT 2Q98 GROSS MARGIN OF
AT LEAST 53%
** MOST LIKELY THE DROP REFLECTS FEARS OF A CHINA DEVALUATION (50% OF
CUBE'S SALES ARE FROM CHINA). CUBE LIKELY WOULD WEATHER THAT
RELATIVELY WELL.
** TIMING NOT GOOD. CHIP STOCKS IN GENERAL IN RETREAT DUE TO SOFT
BUSINESS CONDITIONS AND UPCOMING NEGATIVE SEASONALS. SO WE ARE
HESITANT TO LEAP IN DESPITE WHAT APPEARS TO BE A VERY ATTRACTIVE
OPPORTUNITY UNTIL WE UNDERSTAND BETTER THE MOTIVATION OF THE SELLER.
THERE IS PROBABLY TIME TO THOROUGHLY REVIEW ALL ISSUES. MORE NEWS
AFTER FURTHER REVIEW WITH MANAGEMENT.
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CUBE PLUNGES 18.5% ON ABSENCE OF NEWS. A quick check with management
reconfirmed the trends we noted last week: Our $0.21 2Q98 EPS
estimate on sales of $83 mil. appears slightly conservative. VCD
(video CD; 48% of 1997 sales) sales into China will be seasonally
down but remain relatively robust, and a relatively modest seasonal
pickup in dollar volume remains a reasonable expectation over the
next 6 months. We continue to expect CUBE's 1998 VCD sales down
10%. Divicom (33% of 1997 sales) appears headed for close to 30%
growth on the strength of demand for its TV broadcast digital
encoding equipment. Opportunities for upside in digital settop boxes
(8% of sales) and particularly in DVD (2%) remain on track. Two key
business wins (Divicom, principally a supplier to Echostar, is
expected to win some DirecTV business, and CUBE's partnership with
Matsushita/Panasonic position CUBE for better settop box sales) have
not occurred, but we believe these opportunities, particularly with
DirecTV, remain good.
COULD IT BE FEARS OF A CHINA DEVALUATION? Talk is up in recent days
of the risk of a devaluation in China. We think there is some chance
investors are racing away from CUBE because of this risk since nearly
50% of CUBE's sales come from China. However, CUBE's transactions
are all dollar based, the cost of CUBE's chip is a small percentage
of the end selling price of a VCD, and CUBE has been adjusting
reasonably well to nearly 50% annual price reductions.
If a China devaluation is the problem, we think CUBE will weather it
well.
OR IS IT SOMETHING ELSE? Endless rumors circulate on the collapse of
the VCD business. Far more damaging would be the loss by Divicom of
key Echostar business. Our understanding remains that the VCD
opportunity is gradually declining, and Divicom's relationship with
Echostar is firm.
WE THINK THE STEEP DROP IS A MAJOR OPPORTUNITY, BUT.The timing is
unattractive and our conviction is not 100%. The chip industry
itself clearly is now looking at a 5% 2Q98 decline and facing the
normal negative summer seasonals.
Clearly, there is a heavily motivated seller in the market. Until a
better understanding on the motivation of the seller emerges, a
thorough reappraisal of CUBE's growth and profit opportunities is
required. MORE NEWS AFTER FURTHER DISCUSSIONS WITH MANAGEMENT.
IN SUM, WE ARE HESITANT ON THE TIMING BUT LIKE THE VALUE. We continue
to feel that high gross margin is one of the key attractions of any
chip maker during the current period of poor demand, and CUBE's 2Q98
should at least match or exceed the 53% it achieved in 1Q98. Given
that we also believe CUBE has a high probability of showing sales
acceleration by 3Q98 based on the strength of Divicom in digital
broadcasting, normal VCD seasonality, and start up of more meaningful
DVD and STB volumes, CUBE story becomes more compelling.
Finally, we believe long term CUBE is positioned at the heart of the
most dynamic portion of the chip market, digital video, and will
enjoy strong long term growth and profitability. The good news about
the tough current chip market conditions is that there is probably
time to thoroughly reevaluate the risks in the CUBE story before
stepping in.
BUSINESS DESCRIPTION: Leader in compression technology, the key
enabler for the emerging boom 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.
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