- Cree announced Thursday it had launched a $300 billion share buyback plan as the stock has fallen to a very attractive level.
- With $1.2 billion in cash, Cree can easily afford this buyback, and it has the capacity to expand this authorization over time.
- While bulbs have lower margins, Cree's decision to sell bulbs is working well with sales up over 20% year over year.
- With LED adoption increasing, this growth should last for several years, and Cree could earn $6 per share by 2020.
About two months ago, I urged Cree (NASDAQ:CREE) to use its excessive cash balance to launch a significant share buyback (article available here). On Thursday morning, Cree announced just that, as it launched a $300 million stock buyback authorization (press release available here). This authorization expires June 28, 2015. As of last quarter, Cree had a net cash position of $1.2 billion, and the company is free cash flow positive (all financial and operating data available here). In other words, Cree carries far more cash than it could ever need, making it a financially prudent decision to buy back shares.
Currently, Cree has a market capitalization of $5.52 billion, so this plan should reduce the float by over 5%. In early trading, shares were up nearly 1% as investors digested this positive news. Shares have had a rough few weeks, as investors were unimpressed with the last quarter, sending shares down from $58 to $45 in less than a month. Management clearly thinks that shares are undervalued under $50, which would explain why the company decided to launch the buyback now. Prior to the buyback, cash was nearly $10 per share, so Cree's net value was $35 per share.
In addition to this announcement, the company announced it has already purchased 2.1 million shares at $47.11 for roughly $100 million. As a consequence, $200 million is remaining on this authorization. While Cree has about 13 months until the program ends, the fact the company has already bought $100 million in stock suggests the authorization will be fully consumed well before then. Buybacks are most accretive when they are done opportunistically. In other words, it is better when a company buys back more stock when it's lower and less when it's higher instead of buying the same number of shares every day. Cree has done this by taking advantage of the drop in shares to aggressively buy back stock.
This buyback is a critical shareholder-friendly initiative that will help to cut the diluted share count and accelerate EPS growth. The company also secured a $150 million credit facility to make it easier to repurchase shares. With its $1.2 billion cash hoard, Cree could have launched an even bigger share buyback plan, but this is a solid step in the right direction, and I hope Cree considers making a sizable buyback an annual use of capital rather than a more periodic decision.
This plan makes it clear that management thinks the stock is undervalued after the recent drop, and I think management is right about this. Cree is transforming its business to focus on providing LED bulbs directly to consumers rather than simply supply providing LED products to other bulb manufacturers. The bulb business is lower margin, but there is significant growth ahead. Revenue last quarter from bulbs increased by 21% as consumers adopt much more efficient LED bulbs, which generate significant energy savings over their life. Light bulbs now account for 44% of Cree's sales, and its distribution partnership with Home Depot (NYSE:HD) has been very helpful in developing the Cree bulb brand.
In fiscal 2014 (which ends in June), Cree should earn about $1.64, and I expect earnings to jump to $2.00-$2.10 in fiscal 2015, which represents 25% earnings growth on the back of 20% sales growth. On an ex-cash basis, shares are trading about 18x forward earnings, which is not excessive for a company with Cree's growth profile. Importantly, Cree's growth runway is very long. In other words, it can grow revenue and profits by double-digits for several years. The LED bulb's market share is still dwarfed by legacy incandescent bulbs, but as energy costs continue to rise, the savings it offers become even more dramatic. By 2020, when annual lighting sales should reach $120 billion, LED bulbs could account for 75% of the market. Even if Cree only maintained a 4% market share, which is exceedingly conservative, it would have at least $4.8 billion in revenue and $6 in EPS. We are still in the opening stages of a major growth story. I am glad to see this buyback and would continue to stay long Cree.