Why We Believe Cree’s Stock Is Worth $44
Leading LED manufacturer Cree (NASDAQ: CREE) has seen its top line and profitability decline substantially in the last few years, owing to fierce competition in the LED industry, which has suppressed LED prices, as well as Cree’s market share. However, it is worth noting that Cree’s performance, in terms of both revenues and margins, did dramatically improve in recent quarters on a sequential basis. This comes as a source of respite for management, which is expecting a turnaround in its business in the upcoming quarters. Our price estimate for Cree’s stock stands at $44, which is slightly below the market price following the recent rally.
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Steps To Arrive At Our Price Estimate
Cree generates revenue from three segments: Lighting revenue, LED revenue, and Wolfspeed revenue. The Lighting segment generated $701.5 million in 2017 and we expect it to decline 3% in 2018. Commercial lighting was affected by the continued weakness in the North American market. Cree is looking to boost revenues and margins by investing in channel relationships, improving execution, and continuing to deliver innovative lighting solutions. Cree believes that, even though the previous quarters were soft, the non-residential construction market will pick up in subsequent months. With an expanded product range, the company hopes to get into new applications, which can drive growth going forward. Despite that, it will take several quarters to rebuild significant growth momentum in the Lighting business.
The LED segment generated $550 million in 2017 and we expect it to decline 3% in 2018. Cree is expanding its LED product offering with new high-power and mid-power products that leverage its market leadership. The company has entered into a joint venture with San’an, which can help Cree increase its presence in the mid-power LED component market. However, increased competition will keep a check on prices.
The Wolfspeed business (wide bandgap semiconductors) generated $225 million in 2017 and we expect 25% growth in 2018. This is attributable to higher factory utilization and improved production. The company is seeing significant demand in silicon carbide and is currently working on improving capacity.
A revenue estimate of $1.49 billion and average share count of 98.5 million gives us Revenue per share of $15.14. We expect Cree’s trailing twelve-month P/Revenue multiple to be around 2.93 at the end of 2018, which when multiplied with expected revenue per share, gives us $44 as a fair price estimate.
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