"In coming years we anticipate
Dr. Nakamura's contribution to Cree will be on a scale similar to the impact
Michael Jordan had on the Chicago Bulls franchise, Joe Montana on the San
Francisco 49ers, Joe Torre and the New York Yankees, and Albert Einstein on the
United States of America. "
BANC OF AMERICA SECURITIES ** MONTGOMERY DIVISION ** BANC OF AMERICA SECURITIES
CREE, INC.* STRONG BUY
October 13, 2000
SEMICONDUCTORS
NASDAQ: CREE
DJIA: 10022
S&P 500: 1328
PRICE: $98.44 FYE 6/30 2000 A 2001 E 2002 E
12-MONTH TARGET PRICE: $160 EPS
52-WEEK RANGE: $202-35 Q1(SEP) $0.14 $0.34 A
FULLY DILUTED SHARES O/S: 37.6 MM Q2(DEC) 0.17 0.33
MARKET CAPITALIZATION: $3,701.3 MM Q3(MAR) 0.25 0.37
AVG. DAILY VOL. (3 MOS.): 1,244,506 Q4(JUN) 0.30 0.39
SECULAR EPS GROWTH: 19% FISCAL YR $0.87 $1.43
FY 2001E REVENUES: $182.0 MM P/E N/M 68.8
MARKET CAP./REVENUES: 2034% P/E/G 612% 372%
9/00 TOTAL DEBT: NONE PREV. EST. $1.40
9/00 LTD/TOTAL CAP.: N/M CALENDAR YR $1.22 $1.60
9/00 ROAE: 10.1% P/E 80.7 61.5
9/00 SHAREHOLDERS' EQ.: $476.3 MM P/E/G 436% 333%
9/00 BOOK VALUE/SHARE: $12.66 PREV. EST. $1.19
DIVIDEND/YIELD: NONE
* Banc of America Securities LLC currently maintains a market in this security.
Banc of America Securities LLC was co-manager of a public offering for this
company in the last three years.
Solid Upside Quarter with Key Developments Suggesting and Even Bigger 2001
* Yesterday after the close, Cree reported September quarter earnings of $0.34,
beating by $0.03 our $0.31 estimate, and by $0.02 Street consensus. Top line
growth advanced to $37.6 million, up 12.8% sequentially and 80.4% over last
year, and was essentially in line with our $38 million expectation.
* Cree generated a strong 17% sequential growth from LED revenues, with
significant opportunity for acceleration in 2001 through the addition of
ultra-bright (UB) products (announced last week) that are sampling now and
should start shipping in January. Our customer checks suggest a rapid ramp.
* Cree announced the addition of Dr. Shuji Nakamura, world-renowned researcher
from UCSB, and formerly chief rival Nichia, who led development of the
world's first blue laser and brightest white LEDs recorded. We believe Dr.
Nakamura will be instrumental in advancing Cree technology.
* Given the impact of Cree's gemstone business, phasing out through December,
and no significant upside from three inch wafers or UB LED products until
early 2001, our 2001 revenue and EPS forecast remains unchanged at $225
million and $1.60. Our new price target is $160 from $300, or one times the
company's growth rate of 80% on a $2.00 '01 EPS potential. Reiterating Strong
Buy.
Ultra Bright Products, Three-Inch Wafer Production, and Addition of Dr.
Nakamura Suggest an Even Brighter 2001 Outlook
Yesterday after the market close, Cree reported September quarter earnings of
$0.34 and by $0.02, beating by $0.03 our $0.31 estimate, and the Street
consensus of $0.32. Top line growth accelerated in the quarter, advancing to
$37.6 million, up 12.8% over last quarter and 80.4% over last year, and was
essentially in line with our $38 million expectation. Upside was generated from
gross margins that advanced 10 basis points sequentially to 54.6% from 54.5%
versus our anticipated 100 basis point decrease. Visibility is excellent, with
the December quarter fully booked and backlog additions in the quarter that
extend well into the second half of 2001. We continue to believe demand is not
an issue for Cree, with capacity and yield expansion dictating the amount of
earnings upside Cree will be able to deliver to investors.
Cree continues to innovate on its core SiC technology that has produced the
dominate supplier of Nitride LED devices. This work was again illustrated last
week with the announcement of their new ultra-bright LED that will begin to
ship in January, 2001. After demonstrations in Asia, customers are claiming
that SiC can perform at equal brightness levels with Sapphire. This innovation
and increased capacity coming on line in the beginning of 2001 will help Cree
to continue gaining market share and further solidifying its position as the
world's largest low-cost supplier of LEDs in the market. With this new ultra-
bright version we believe numerous new applications can now implement Cree's
LED which were not able to in the past. We expect expansion in displays,
automotive applications, high brightness large displays, and general
illumination. Recently in the handset market there has been a trend in Asia
toward brighter white backlighting applications with only one current possible
supplier, but we believe with this new product, Cree is capable of designing in
its product into these exploding applications. Our checks with customers
suggest rapid industry adoption and market penetration by UB product.
We believe the UB product does not mark the last of Cree's quantum leap
brightness improvements. Yesterday Cree announced the addition of Dr. Shuji
Nakamura to its development efforts. Dr. Nakamura is a world-renowned
researcher from UCSB who developed the world's first blue laser and led
development efforts of the brightest white LEDs recorded. He is also the leader
of the technical team that created rival Nichia's brightness leadership
position in the blue-white LED industry today. He joins the Cree team
exclusively on a part-time basis enabling Cree to further entrench their
position as the world LED leader that will transform the conventional lighting
market. In our opinion investors should not underestimate the addition of this
talent to Cree research and development efforts. In coming years we anticipate
Dr. Nakamura's contribution to Cree will be on a scale similar to the impact
Michael Jordan had on the Chicago Bulls franchise, Joe Montana on the San
Francisco 49ers, Joe Torre and the New York Yankees, and Albert Einstein on the
United States of America.
In addition to higher brightness LEDs, another product line that is starting
to ramp at Cree and holds huge potential for diversified revenues is Cree's RF
products. The company announced sampling of a new 30W product in January of
2001 as well as customers taking shipment of pilot volumes. This product with
their current 10W product are significant within the RF industry and have
significant performance advantages that should facilitate deployment in the
CY2001 time frame. We have had indications through industry sources that the
30W product is crucial to the RF community and should help to increase the
advantages of using the SiC over current materials in their driver amplifier
applications. The company did also confirm that they would have a 60W, 100W,
and 120W product available possibly by the end of CY 2000. In the RF space, the
company announced during the quarter an investment in Xemod, a RF power
amplifier manufacturer, this is significant in the respect that they are a
leader in the new PA design methodology of using modules rather than discretes.
This along with pursuit of major infrastructure players and RF component
distributors should help Cree establish its SiC product as a premier solution
for the new high power, high frequency systems demanding more power and more
heat dissipation.
Cree also confirmed the development of the blue laser product and that they
were experiencing positive results from the product targeted at the DVD market
with increased optical storage capacity with reading and writing capability.
Continued efforts are being made to decrease material defects and to optimize
device design while confidently forecasting a product for FY 2002. In addition
to increasing the brightness of its LEDs, we believe Dr. Nakamura will also be
instrumental in advancing Cree's laser development efforts.
Cree's balance sheet remains strong. Cash and equivalents increased a slight
$500,000 to $266.1 million from $255.4 million even as the company continues to
aggressively build out production capacity, and long-term debt remained at
essentially zero. Days of inventory were up one to 57 days versus 56 previously
in keeping with increased levels of sales and indicating that Cree is
transitioning away from its gemstone business smoothly. We believe the phasing
out of Gemstones will be completed in the December quarter. Given the impact of
Cree's gemstone business, and no significant upside from three inch wafers or
UB LED products until early 2001, our 2001 revenue and EPS forecast remains
unchanged at $225 million and $1.60. Our new price target is $160 from $300, or
one times the company's growth rate of 80% on the $2.00 in upside EPS potential
we believe Cree is capable of generating through new products and production
capacity. We reiterate our Strong Buy rating.
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