Cree Plans To Spin-Off Its Power And RF Division To Unlock Its Full Value

-22.09%
Downside
80.07
Market
62.38
Trefis
CREE: Cree logo
CREE
Cree

Cree (NASDAQ:CREE), recently announced that its power and radio frequency business segment will issue shares in a IPO to be a separate publicly traded company. The company has filed registration statement with the U.S. Securities and Exchange Commission. The type and number of shares of stock to be sold and the price range for the proposed initial public offering has not yet been determined, although Cree intends to remain the majority stockholder of the subsidiary post offering. The offering would enable Cree management to better focus on its LED and Lighting business, while also creating a dedicated focus on the Power and RF business. The company believes that this transaction should allow Cree shareholders to better realize the full value of both businesses. Frank Plastina, a current Cree board member, will be the interim executive vice president of the division, effective June 8th. He will serve as the CEO of the company after the IPO. Since the announcement, Cree’s share price has risen by approximately 6%, to $31.48. (Read Press Release)

For the fiscal year that ended in June, Cree’s power and RF business generated $118.2 million in revenue, up 20% from a year ago. That amounted to just 6% of Cree’s $1.68 billion in total revenue, which is why the power and RF business hasn’t attracted much attention outside the industry. But Cree’s smallest business is also its most profitable, percentage-wise. The power and RF business posted gross margins of 56.5%, versus 45.7% for its LED products and 27.9% for its lighting products. For Q1 2015, the subsidiary accounted for 8% of Cree’s total revenue.

Our price estimate of $35 for Cree is at a an approximate 10% premium to the current market price.

Relevant Articles
  1. 9% Drop In Cree Stock A Buying Opportunity?
  2. Strong Demand Revival Could Help Cree Stock Regain Recent Highs
  3. Cree Stock Seems Overpriced After 2.5X Move
  4. Could Cree Stock Drop To $80?
  5. What’s The Downside On Cree Stock?
  6. Cree Stock To Drop More Than 20%?

See Our Complete Analysis for Cree Here

Spin-Off Will Unlock Additional Value For CREE’s Power And RF Business

John Palmour, company co-founder and chief technology officer for Cree’s relatively obscure power and radio-frequency, or RF, business unit, estimated that the market addressed by Cree’s power diodes and transistors exceeds $5 billion today, while the RF products are attacking a market that currently accounts for $1.5 billion to $2 billion in sales. Expanding into new markets is part of the game plan. Cree forecasts that the power and RF business will grow at a 12% to 15% annual pace over the next several years, which actually is below last year’s pace as growth rate slows a bit with the base getting bigger. [1]

Cree could very well cash in on the proposed spin-off of its power and RF business. As already pointed out above, while the group makes up only 6% of Cree’s annual revenues, its products have a high gross profit margin(~56%). And Cree’s top exec recently predicted continued growth in power segment while LEDs face challenges. Even though CREE’s LED and power and RF business share similar technology, their sales and marketing strategies, as well as their targeted end markets, differ entirely.

Power & RF is Cree’s smallest business segment, but it is growing. In telecom applications, Cree says its gallium nitride technologies improve the efficiency, bandwidth, and frequency of products using gallium arsenide. In power applications, CEO Chuck Swoboda said efficiencies of its silicon carbide technologies offer advantages in clean energy applications. With the independent company, CREE would be able to leverage on its technology and give more space to its power and RF segment, thereby, unveiling the overshadowed potential of the subsidiary.

View Interactive Institutional Research (Powered by Trefis):

Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap

More Trefis Research

Cree (NASDAQ:CREE),
Notes:
  1. CREE Strengthens Its $100 Million Power & RF Business By Adding New Products To Its Portfolio, Trefis []