Cree Renames It Power & RF Division Wolfspeed, Prepping A Spin-Off To Unlock Value For Shareholders
In May 2015, leading LED manufacturer Cree (NASDAQ:CREE) announced its decision to spin off its Power & RF business into a separate publicly traded company. Earlier last week, Cree announced a new company name (Wolfspeed), brand identity and purpose for the spun-off division, in advance of its IPO which it plans to execute in fiscal 2016. As a Cree company, Wolfspeed will leverage Cree’s industry-leading brand, global footprint, scale and expertise to ensure a smooth transition for customers. (Read Cree’s Press Release)
The news of the spin-off was well received by the investor community. We believe the move will help Cree focus exclusively on restructuring its LED business and unlock the full potential of its Power and RF business. While it continues to see strong growth in its lighting business, Cree’s profitability in the LED business is suffering from excess supply and the resulting dramatic price reductions. The company’s restructuring plan, initiated last quarter, aims to reduce excess capacity and overhead to improve the LED cost structure, going forward.
Cree is a leader in silicon carbide (SiC) power products and gallium nitride (GaN) radio frequency (RF) devices. It is the only player in the industry with a fully commercialized, broad portfolio of the most field-tested SiC and GaN power and wireless technologies and products in the market. While the Power and RF division accounts for less than 10% of Cree’s total revenue, the division is much more profitable compared to LED and Lighting products. Power and RF products offer gross margin in excess of 50% as compared to 7% and 25% earned on LED products and lighting products, respectively.
John Palmour, company co-founder and chief technology officer for Cree’s power and RF business unit, estimated that the market addressed by Cree’s power diodes and transistors exceeds $5 billion today, and the RF products is targeting a market that currently accounts for $1.5 billion to $2 billion in sales. Cree forecasts that the power and RF business will grow at a 12% to 15% annual pace over the next several years.
In July 2015, Cree acquired Arkansas Power Electronics International (APEI), a global leader in power modules and power electronics applications. Combining two highly complementary innovators, the acquisition will enable Cree’s Power and RF business to extend its leadership position and help to accelerate the market for high-performance, best-in-class SiC power modules. The companies’ shared mission to deliver the industry’s most innovative SiC power products has already led to successful collaborations on multiple government contracts.
Wolfspeed aims to power its customers’ innovations, enabling higher power density, higher switching frequencies and reduced system size and weight. Cree claims that these advantages lead to smaller systems, lower system costs and improved performance, and will ultimately lead to more powerful applications in the transportation, industrial and electronics, energy, and communications markets. Expanding into new markets is part of the company’s growth strategy.
Our $33 price estimate for Cree is at a more than 20% premium to the current market price.
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