Cree Makes Edison Proud

Mar. 7.13 | About: Cree, Inc. (CREE)

Cree (NASDAQ:CREE) shares took a big jump Tuesday on news that they are introducing a new series of LED light bulbs. The new series of bulbs will be offered at a retail price point that gives consumers a greater incentive to switch from incandescent bulbs. Other benefits include the new bulb lasts 25 times longer, saves 84 percent more energy and will save $61 for consumers who replace their top 5 most used light bulbs. That sounds like something that customers will like.

In addition to that announcement, they also raised revenue and income estimates for the third quarter ending March 31, 2013. The revenue target is now $335 million to $350 million. The target for GAAP net income has been increased to a range of $18 million to $24 million or $.16 to $.21 diluted share. The target for Non-GAAP net income has been increased to a range of $36 million to $42 million, or $0.31 to $0.36 per diluted share and gross margin is targeted to be similar to Q2.

Cree has been on an absolute tear the past 5 months, rising over 100 percent, making some think it may be too late to jump aboard this train. Let's take a look at some of the fundamentals to get a more accurate assessment of Cree's financial position. Here is a financial snapshot for the quarter ending December 30, 2012.

When looking at the balance sheet, Cree has a book value of $2.6 billion, giving them a book value per share of $22.73 with most of their assets being tangible at $2.23 billion. Total cash on hand equals $7.64 per share with a current ratio of 7.38 and just $200 million of total debt. Cree has a balance sheet that gives them the flexibility they need to grow.

The income statement of the same date shows that Cree grew revenues an impressive 13% quarter over quarter. Net income grew 66% quarter over quarter and 50% over the comparable 6 months. Gross margins increased from 34% to 38% and net margins increased from 3.9% to 5.7%. Cash flows increased by 45% compared to the comparable 6 month period.

Cree's financial statements are in excellent shape. Next let's evaluate the fundamentals further to see if these numbers justify Cree's current stock price. Cree is currently trading just north of $50 and seems to be expensive after the recent run as well as volatile. Volatility, however, should not be feared if you do your homework.

Cree's current PE is close to 106 with earnings per share of $.48 cents but their 1 year forward PE ratio is only 33. A price to earnings ratio of 33 is much more reasonable but still demands a fairly high growth rate to justify the price. The earnings growth rate for this fiscal year is expected to be 35% along with 35% again in 2014. If earnings were to grow at another 35% clip, the 2 year forward PE would be 21. That is still a long time to wait for the PE ratio to become reasonable, however with the current growth rate that may be justifiable. According to Yahoo Finance, Cree has a 5 year PEG ratio of 1.68 which is relatively low yet high compared to some of its peers.

Looking at the broader market, we see that LEDs only account for about 10% of the current lighting market; however, LED's share of the market is expected to be as high as 60% by 2020. This is probably over-ambitious as most forecasts are closer to 30%, however that is still impressive growth. If this is a market that you think is worth investing in, but think Cree is priced too rich for your blood, then you should consider a derivative play called Veeco Instruments (NASDAQ:VECO). Veeco is the company that makes the equipment to manufacture LED lighting and is trading at much humbler PE ratio of 20. It has been trading in a range for the past 3 to 5 months and may be preparing to follow in Cree's footsteps with a breakout.

Lastly, it is important to look at the institutional ownership for a stock. Institutional ownership for Cree is at 88 percent and Veeco Instruments' is very high as well. This tells us that institutions feel very positive about the prospects for this space. However, there is also a substantial short interest in both stocks that investors must be aware of. When you drill down further to see if there are any high profile hedge funds owning Cree, Renaissance Technologies stands out in the crowd as they have doubled their holdings in Cree during the past quarter. This can be looked at as very positive as Renaissance's Medallion fund generates annual returns above 30% consistently.

We have run through a quick fundamental analysis of Cree Inc. They have had a nice run over the past few months and this investment should be approached with caution. However, given their pipeline of technological innovation one could speculate that this is going to be a game changer for them and for their industry. Taking that into account with their strong financial position and Cree looks like an interesting value even at these levels.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.