Cree Creates a Double
By Paul Larson
February 24, 2000
Cree Inc.
Ticker: (Nasdaq:CREE - news)
Phone: 919-313-5300
Website: www.cree.com
Price (2/24/00): $166 3/4
By Paul Larson
How Did It Double?
One of the best performing stocks over the past 12 months is that of Cree, Inc. The company has seen its shares go from near
$15 a share a year ago to over $160 at today's writing, which is more than enough of a rise to grab our Foolish attention.
There have been two primary factors behind Cree's meteoric rise. First, the company has reported impressive and improving
financial fundamentals. For nine straight quarters the company has posted higher sales and net income than the same period in
the previous year. The most recent quarterly results are typical of what Cree shareholders have come to expect:
calendar Q4 1999 Q4 1998 % Change
Sales $23.9 $14.0 70.5%
Gross Profit $12.7 $6.6 92.5%
Net Income $5.8 $2.8 102.9%
EPS $0.18 $0.10 80.0%
Gross Margin 53.2% 47.1%
Net Margin 24.2% 20.3%
(in millions, except EPS)
Beyond impressive profit growth, Cree has seen increased excitement about the next generation technologies the company is
working on. Cree has been investing heavily into research on blue lasers, which is something that has awesome commercial
potential if some of the current problems can be solved. Cree has proven itself to be adept at identifying technologies that have
real potential and then researching to bring scientific theory to commercial reality. Clearly, the market is expecting more of the
same success from Cree in the future.
Cree has also raised the floor on its stock in recent weeks. On January 18, the company had a secondary offering of 3.289
million shares at $85 1/8, bringing Cree an additional $266 million in cash fertilizer to further grow its business. The shares have
more than doubled in just the past month alone, no doubt thanks partially to Cree's underwriters singing the praises of the
company.
While the color blue, as in blue light emitting diodes (LEDs) and the potential of blue lasers, is extremely important to the
company's fortunes, Cree shareholders are feeling anything but blue after seeing the value of their stock in crease tenfold over
the past year.
Business Description
Cree was started in 1987 by a group of scientists from North Carolina State University who were interested in the use of silicon
carbide (SiC) as a semiconductor material. The research into SiC has paid off, and now the company makes a wide variety of
chips and diodes that work at higher temperatures and voltages than typical semiconductors. Cree is today's world leader in
SiC semiconductor production.
The company also makes blue LEDs, which round out the LED color spectrum and are more intense than the red or green
LEDs that have been around for years. Cree's LEDs are beginning to be used as a light source in everything from car
dashboards to wireless phones to large, full color displays, like those found in sports arenas.
Cree is also putting significant research efforts into the commercial development of blue lasers. Blue lasers have a shorter
wavelength than red lasers, which means they can potentially increase to a large degree the amount of data that can be stored in
optical disk systems.
Recently, Cree shortened its name from Cree Research. The company is based in Durham, North Carolina.
Financial Facts
Income Statement
12-month sales: $77.7 million
12-month income: $17.9 million
12-month EPS: $0.59
Profit Margin: 23.0%
Market Cap: $5816.7 million
Balance Sheet (as of 12/26/99)
Cash: $43.9 million
Current Assets: $67.7 million
Current Liabilities: $14.1 million
Long-term Debt: $4.7 million
Ratios
Price-to-earnings: 282.6
Price-to-sales: 74.9
How Could You Have Found This Double?
One of the ways to have possibly found Cree was to have subscribed to the Foolish Eight Spreadsheet. Cree first showed up
on this Foolish screening tool back in March of 1999 when it fit all of the following criteria:
1.A high relative strength of 90 or more
2.A minimum price tag of $7 per share
3.Daily Dollar Volume somewhere from $1 million to $25 million
4.Sales and earnings growth of 25% or greater
5.$500 million or less in sales
6.Net profit margin of at least 7%
7.Insider holdings of 10% or more
8.Positive cash flow from operations
Unfortunately, Cree was dropped by the screen last November because the daily dollar volume had picked up well beyond
$25 million. (Today's average daily trading volume is close to $200 million.) The Foolish Eight is meant as a small-cap screen,
and Cree is clearly and quickly becoming a mid-cap. Nevertheless, those looking at the above criteria would have found Cree
blinking brightly on their radar.
In addition, Cree has shown some significant margin improvement coupled with impressive sales growth, which is always an
explosive mixture for profits. There were also plenty of other signs that Cree was a company about to hit turbo. Cree is having
a hard time filling all the demand for its blue LEDs, which is an indication of how strong demand is for this particular product.
Plus, commercial uses for its SiC semiconductors have continued to expand rapidly, and yet again Cree is selling just about
everything it can possibly make.
Where to From Here?
Cree has earmarked a good chunk of the money from its secondary offering for expansion. The company's current production
lines are basically running at capacity, and new manufacturing equipment and facilities are in the process of being acquired.
Hitting up Wall Street for additional cash for this purpose seems to have been a good decision since the commercial viability of
many of Cree's products has largely been proven. Now it is just a matter of ramping up production to meet demand.
It is also appears to be a good idea for Cree to use this cash to try to cement its lead as the world's predominate SiC supplier.
Cree does have numerous competitors in both the SiC and LED markets, but they are either very small or have yet to produce
products that have the same quality and specifications as Cree.
One only has to look as far as Intel (Nasdaq:INTC - news) to see an example of a company that has always had competition
but has also been able to stay one or two steps ahead in research and manufacturing efficiency. Cree's strategy looks to be very
similar. Namely, it is trying to reduce costs and improve product quality faster than the competition. Cree has succeeded thus
far, which is one of the reasons it is the leading provider in the vast majority of the markets it serves. Simply said, there isn't
anything on the horizon today that looks to obviously change this situation.
While there's little doubt that Cree is an attractive company, it is still a little company with an oversized valuation. Cree, as of
this writing, is coming close to having a $6 billion market capitalization, yet its sales run rate is just now approaching $100
million. Unlike many Internet-focused companies, Cree will also have a moderately difficult time scaling its business since it is a
manufacturer of physical products and needs time to build production and distribution facilities.
Will Cree see demand for its SiC chips and blue LEDs continue to skyrocket? That's almost a sure thing. Over the next five
years, will Cree be able to achieve the 40+% annual growth in earnings that analysts are expecting? That looks like a fairly safe
bet, too. Does Cree's future cash flow justify today's stock valuation? That's a lot harder, if not impossible, to answer. The
stock may look overvalued today, but Cree appears to be a winning company of top-shelf quality.
Related articles:
Cree Company Snapshot
Cree Message Board
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