Cree Is Already Up 45%--What to Expect Next

Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Cree (NASDAQ: CREE) shares are up 45% in the quarter. By most metrics, shares are now over-valued. Cree trades at a P/E of over 90, a forward P/E of over 25, and a PEG (price-to-earnings growth) of 4.5.

After the run-up, did investors already miss the boat? When shares move up rapidly and by a large amount in such a short amount of time it should scare away value investors. Yet Cree could be a different story.

Quarterly Earnings Summary

Cree reported a strong quarter, and provided good guidance for its next quarter. In Q2 2013:

  • Revenue rose 10% to $346 million
  • Earnings rose to $0.32 per diluted share or 37 million (non-GAAP)
  • Lighting sales rose 14%, or by more than $14 million
  • LED sales increased over $13 million, or up 7% from the previous quarter
  • Margins increased to 39.2%

Cree’s Advantage

It is often dangerous for investors searching for ideas based on deep value only to come up with an idea that breaks traditional valuation metrics. Cree breaks these valuation metrics at its current share price of nearly $44. Cree’s advantage in the marketplace could justify its current market value. First, Cree repositioned itself over the last several quarters to be in vertical markets. This means that its acquisition of Ruud Lighting exposed the company to the retail markets. Cree itself improved its supply chain by reducing inventories to 78 days on hand, increasing gross margins, and improving R&D efficiency.

The integrated vertical lighting model is approaching full-efficiency, but there is room for further efficiencies. For shareholders, this means that Cree is less susceptible to LED competition from China and other players.

Competitive Risks

Cree is not alone in the LED space: Veeco (NASDAQ: VECO) and Rubicon (NASDAQ: RBCN) are companies to examine more closely. Veeco recently gained an order from KaiStar, which ordered Veeco’s TurboDisc manufacturing system that includes the MaxBright product. Unfortunately, Veeco has exposure to the solar space. The short-float is 18.9% for Veco, while Cree’s short-float is around 14%.

Rubicon, an LED wafer firm, is not performing well on the markets. In addition to having a much smaller market cap ($142 million compared to Cree’s $5.13 billion), Rubicon guided Q4 revenue to be flat last November. The company expects earnings to be at a loss of $0.02 to $0.05 per share.

Valuation

Cree is richly valued compared to related companies in the sector, but the company also has a market cap that is over 3-times greater than that of Veeco. Investors are also paying much more for sales, as Cree commands a Price/Sales ratio that is double that of Veeco and Rubicon Technology:

<table> <tbody> <tr> <td> <p><strong>NAME </strong></p> </td> <td> <p><strong>MKT CAP </strong></p> </td> <td> <p><strong>AVG VOL </strong></p> </td> <td> <p><strong>EPS </strong></p> </td> <td> <p><strong>P/E </strong></p> </td> <td> <p><strong>PRICE/SALES </strong></p> </td> <td> <p><strong>EBITDA </strong></p> </td> </tr> <tr> <td> <p>Cree, Inc.</p> </td> <td> <p>5.07B</p> </td> <td> <p>1,837,100</p> </td> <td> <p>0.48</p> </td> <td> <p>91.15</p> </td> <td> <p>4.06</p> </td> <td> <p>209.79M</p> </td> </tr> <tr> <td> <p>Rubicon Technology, Inc.</p> </td> <td> <p>143.56M</p> </td> <td> <p>345,608</p> </td> <td> <p>-0.17</p> </td> <td> <p>-</p> </td> <td> <p>2.13</p> </td> <td> <p>304.00K</p> </td> </tr> <tr> <td> <p>Veeco Instruments Inc.</p> </td> <td> <p>1.24B</p> </td> <td> <p>570,042</p> </td> <td> <p>1.6</p> </td> <td> <p>20.16</p> </td> <td> <p>2.13</p> </td> <td> <p>99.50M</p> </td> </tr> </tbody> </table>

(Data Source: Yahoo! Finance)

When the POP, or Price of Profits, is charted against quarterly sales, Cree is at an advantage. Investors are assigning it a low forward multiple of 34, compared to 68 for Rubicon Technology and 45 for Veeco Instruments.

 

<img src="/media/images/user_15008/cree-qtrsales-pop_large.jpg" />

Data Source: Kapitall.com

Conclusion

Cree’s strong guidance supports the recent rally, and barring a reversal in overall market sentiment has room to trade higher. The company has a number of new products in the pipeline. For example, the LM16 LED lamp replaces the obsolete halogen MR16 lamp. LED adoption is continuing: for investors, the question is not when, but at what rate. Cree’s superior lighting efficiency compared to CFL and incandescent lighting clearly ensures that the future is bright for the company.


chrispycrunch has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus