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Will Cree Light the Way in LED? Earnings Analysis

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Yesterday, Cree (NASAQ: CREE) discussed its Q4 2013 results. CEO, Charles M. Swoboda said  that Cree was "in a great position to take advantage of the global shift to LED lighting." Ludo Carnotensis, a former CEO at Philips Lighting (NYSE: PHG) has previously called Cree "a disruptive force" because the company recently released an LED light bulb for less than $10 and was able to beat out Philips for shelf space at Home Depot (NYSE:HD). Based on Cree's preliminary financial results we analyze the company relative to its peers (see the end of this post for the peer set).

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 Our analysis is based on the company's performance over the last twelve months (unless stated otherwise). The table below shows the preliminary results along with the recent trend for revenues, net income and returns.

Annual (USD million) 2013-06-30 2012-06-30 2011-06-30 2010-06-30 2009-06-30
Revenues 1,386.0 1,164.7 987.6 867.3 567.3
Revenue Growth % 19.0 17.9 13.9 52.9 15.0
Net Income 86.9 44.4 146.5 152.3 30.7
Net Income Growth % 95.7 (69.7) (3.8) 396.9 (3.7)
Net Margin % 6.3 3.8 14.8 17.6 5.4
ROE % 3.2 1.8 6.8 9.4 2.6
ROA % 3.0 1.7 6.3 8.5 2.3

Valuation Drivers

Cree, Inc. currently trades at a higher Price/Book ratio (3.2) than its peer median (1.8). The market expects more growth from Cree than the median of its chosen peers (PE of 102.4 compared to peer median of 31.9) and to improve its current ROE of 3.2% which is around peer median.

The company's relatively high profit margins (currently 6.3% vs. peer median of 5.0%) are burdened by asset inefficiency with asset turns of 0.5x compared to the peer median of 0.6x. Overall, this suggests a margin driven operating model relative to its peers. Cree's net margin has increased 2.5 percentage points from last year's low but is still below its five-year average net margin of 9.6.

Superior Growth Prospects

Cree has grown its revenues faster than its peers (16.9% vs. 13.4% respectively for the past three years). The market also sees relatively higher long-term growth prospects for the company, giving it a better than peer median PE ratio of 102.4. Overall, we classify the company's growth prospects as superior relative to its peers.

Betting Heavily on the Future

Cree's annualized rate of change in capital of 27.9% over the past three years is greater than the peer median of 16.3%. This relatively high investment has generated a less than peer median return on capital of 4.0% averaged over the same three years. The relatively high investment and low current returns lead us to believe that the company is betting heavily on the future.

Trend Charts

Quarterly Revenues Trend for Cree, Inc. (NASDAQ: <a class=CREE)" class="aligncenter size-full wp-image-7190" data-mce-src="" height="288" src="" title="Revenues-Trend--USD-million--Quarterly-cree_nasdaq" width="348" />
Annual Revenues Trend for Cree, Inc. (NASDAQ: <a class=CREE)" class="aligncenter size-full wp-image-7191" data-mce-src="" height="288" src="" title="Revenues-Trend--USD-million--Annual-cree_nasdaq" width="348" />
Quarterly Net Margin for Cree (NASDAQ: <a class=CREE)" class="aligncenter size-full wp-image-7194" data-mce-src="" height="288" src="" title="Net-Margin-Trend-----Quarterly-cree_nasdaq" width="348" />
Annual Net Margin for Cree (NASDAQ: <a class=CREE)" class="aligncenter size-full wp-image-7195" data-mce-src="" height="288" src="" title="Net-Margin-Trend-----Annual-cree_nasdaq" width="348" />


Cree, Inc.'s analysis versus peers uses the following peer-set: SK Hynix Inc. (000660-KR), Mediatek Inc. (2454-TW), Micron Technology, Inc. (NASDAQ:MU), Broadcom Corporation Class A (NASDAQ: BRCM), Analog Devices, Inc. (NASDAQ: ADI), ON Semiconductor Corporation (NASDAQ:ONNN), TriQuint Semiconductor, Inc. (NASDAQ: TQNT), II-VI Incorporated (NASDAQ: IIVI), Diodes Incorporated (NASDAQ: DIOD) and IXYS Corporation (NASDAQ: IXYS).

Company Profile

Cree, Inc. develops and manufactures semiconductor materials and devices based on silicon carbide, gallium nitride, silicon and related compounds. Its product line includes blue and green LED chips, LED Components, LED Modules, LED lighting, power switching devices and radio frequency devices. The company was founded by Calvin Carter Jr., John Palmour, Neal Hunter, Eric Hunter and John Edmond in 1987 and is headquartered in Durham, NC.

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