CREE Market Research & Analysis Report
Updated May 20, 2015

Growth and Balance Sheet

Cree Inc. (CREE) reported fiscal third-quarter net income of $651,000. The company said it had profit of 1 cent per share. Earnings, adjusted for one-time gains and costs, came to 22 cents per share. The results fell short of Wall Street expectations. The maker of energy-efficient lighting posted revenue of $409.5 million in the period, which beat Street forecasts. For its fourth quarter of fiscal 2015 ending June 28, 2015, Cree targets revenue in a range of $420 million to $440 million with GAAP gross margin targeted to be 31.3%+/- and non-GAAP gross margin targeted to be 32.0%+/-. GAAP gross margin targets include stock-based compensation expense of approximately $3.3 million, while our non-GAAP targets do not. Operating expenses are targeted to increase $5 million compared to fiscal Q3. The tax rate is targeted at 9.0%+/- for the fourth quarter of fiscal 2015. GAAP net income is targeted at $4 million to $9 million, or $0.04 to $0.08 per diluted share. Non-GAAP net income is targeted in a range of $26 million to $31 million, or $0.24 to $0.28 per diluted share. The GAAP and non-GAAP net income per diluted share targets are based on an estimated 108.5 million diluted weighted average shares.

Valuation

Cree Inc. P/E stands at 67.62 above the industry average of 10.92, and above the S&P 500 average of 17.80 The company is currently trading above the maximum P/E ratio of 15x, and over the last five years, the company’s shares have traded in the range of 35.20x to 47.80x trailing 12-month earnings. CREE's current Price/Sales of 2.03 is below the average of its industry of 1.93. CREE’s head to head comparison to its main competitors shows that the company has gross margin below it’s peers, and one that is at the industry average. The achieved operating margin of the company is below the average operating margin of the selected competitors, and it is below the industry average. The quarterly revenue is below the industry average. The stock is currently trading at its intrinsic value of $31.09 this suggests that the stock is currently fairly valued at these levels. The beta of 1.92 implies higher volatility of the stock with respect to the S&P 500. CREE has shown neutral earnings consistency over the last five years. Company’s earnings have increased by 24.04% over the same period. The current quarter earnings in comparison to the same quarter last year have decreased by 95.65%. CREE’s Total Debt/Equity of 5.57 is below the required maximum. CREE’s current price levels are below the maximum level, is trading  69% below the 52 week high of $53.33, and the technical analysis give a neutral view of the stock. The majority of analyst ratings are neutral.

About CREE

Cree, Inc. develops, manufactures, and sells lighting-class light emitting diode (LED), lighting, and semiconductor products for power and radio-frequency (RF) applications in the United States, China, Europe, South Korea, Japan, Malaysia, and Taiwan. The company’s LED Products segment provides blue and green LED chips that are used in various applications, including video screens, gaming displays, function indicator lights and automotive backlighting, headlamps, and directional indicators; LED components comprising packaged LED products for lighting applications, and surface mount and through-hole packaged LED products for video, signage, general illumination, transportation, gaming, and specialty lighting applications.

Competitor Comparison

Cree, Inc. (NasdaqGS: CREE) N.V.

Highlights

The Company competes with Nichia Corporation (Nichia), OSRAM opto Semiconductor GmbH (OSRAM), Koninklijke Philips Electronics N.V. (Philips), Samsung LED Company (Samsung), OSRAM, Toyoda Gosei Co., Ltd., and Epistar Corporation, as Acuity Brands, Inc., Cooper Industries plc, General Electric Company, Hubbell Incorporated. The stock closed yesterday’s trading session at $31.48. In the past year, the stock has hit a 52-week low of $27.25 and 52-week high of $53.33. CREE has a market cap of $3.44 billion and is part of the technology sector.

• Wide product portfolio  
• Focus on research
• Rising demand for energy saving products 

• Small customer base    
• Changing technology environment      
• Intense competition 

CREE Intrinsic Value

Stock Valuation Model & Intrinsic Value Definitions

Investors should keep an eye open for stocks that are trading within 10% of their 52-week highs, as it is likely to continue in its upward trend. CREE's 52 week high is $53.33 current price is 31.48, is 69% below the 52 week high.

The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be "moderate", which in this model states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. The company has a P/E ratio of 67.62 well above the average industry P/E ratio of 10.92 and is above the S&P 500 P/E ratio of 17.80.

When there is strong insider ownership which we define as 8% or more, management is more likely to act in the best interest of the company, as their interests are right in line with that of the shareholders. Insiders own 1.55% of CREE stock. Management's representation is not large enough. This does not satisfy our minimum requirement; companies that pass this test are more attractive to our valuation model

The model is using several technical indicators (MACD, RSI, MFI, OBV, position Indicators) to forecast the trend of the stock for 6 and 12 months, and assign a value.

CREE is trading in the range of $29.05 - $36.14 in the past 30 days. The stock has been showing support at $29.30 and resistance in the $32.60 range. The stock is trading below the 50-Day Moving Average and below the 200-Day Moving Average. The RSI(14) is 42.99. Our indicators give a neutral view on CREE.

The financial health of the company the higher the better, we evaluate all the financial ratios of the company.

Investor’s sentiment for the stock.

The model assigns a value according to analyst’s recommendation for the stock. Analyst rating on Reuters.com is 1 Buy, 2 Outperform, 13 Hold, 1 Underperform and 1 Sell.

We are searching for EPS numbers that are better than the previous year's. One dip is allowed, but the following year's earnings should be higher than the previous year. CREE’s annual EPS for the last 5 years were 1.46, 1.33, 0.38, 0.74, 1.01 this type of earnings action is neutral.

The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20% or should be less than the average Debt/Equity for its industry. CREE’s have total debt/equity ratio of 5.57% which is bullish.

The EPS growth for this quarter relative to the same quarter a year earlier is above the minimum 15% that this model likes to see for a "good" growth company. Stocks with improving earnings are worthy of your extra attention. CREE’s EPS growth for this quarter relative to the same quarter a year earlier is -95.65%, below our target.

This stock valuation model looks for annual earnings growth above 12%, but prefers higher than 20%. CREE’s annual earnings growth rate over the past five years is 24.04%, above the target growth rate.

¹Tradespoon Score and Outlook: This score conveys Tradespoon’s long-term outlook of 1 to 5 years for a particular stock. Tradespoon uses proprietary methods to rate its trading picks on a scale from 1 to 10, with a 10 being the most favorable expected risk and return outlook. To determine a stock’s rating, Tradespoon uses an advanced algorithm that factors in fundamental and technical analysis to determine a stock's expected risk and return.