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No. of Recommendations: 11
Warning, extremely long post!

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OK, a stab in the dark at a future valuation for CREE.

First, some historical information. Through FYE 1999. (My source for this data is Value Line). Respective PEs are in parentheses after any given stock price.

FY 1996 EPS of $.01. High Price of $10.80 (1080) and Low Price of $4.10 (410)

FY 1997 EPS of $.14 High Price of $14.80 (105.7) and Low Price of $4.70 (33.6)

FY 1998 EPS of $.24 High Price of $24.10 (100.4) and Low Price of $5.30 (22.1)

FY 1999 EPS of $.45 High Price of $89.20 (198.2) and Low Price of $14.90 (33.1)

Now some current information. This requires me to combine actual figures through FY 3Q ended March 31, 2000 with the consensus EPS estimate of $.27 for FY 4Q. That gives me a FY 2000 EPS of $.86.

FY 2000 EPS of $.86 High Price of $202 (234.9) and Low Price of $66.69 (77.6)

O.K. here is some rudimentary analysis based on the above.

Average High PE is 344 and Average Low PE is 115.3 (this assumes FY 2000 as projected above).

However, FY 1996 is a real aberration. Note: I do not consider FY 2000 to be an aberration since revenue and earnings acceleration justify the increasing PE ratios, and they have been within reason (High PE ratio up 18.5% while EPS up almost 92%)

If you eliminate FY 1996 figures, the average High and Low PEs are 160 and 41.6, respectively.

Current PE at $165/share and FY 2000 EPS estimates at $.86 is 192.

Soooo, is CREE currently overvalued?

Personally, I think the answer is an unqualified "perhaps." I know, I hedged a little, but hear me out. Depending on when you bot this year, CREE has already doubled. If you bot when I did, CREE is already up 450+% (October, 1999). If I expect this continued share price growth for the next 5 years, I think I will be disappointed.

So where do I go from here? Let's look at some projected growth rates for earnings and revenues for the next five years. To many of you these numbers will look very low. At first blush, they did to me also, but then I got to thinking that I am asking CREE to average these numbers year in and year out for the next 5 years. Granted, they are well below the numbers that everyone expects from CREE this year, but the future is pretty uncertain and as revenues and earnings grow, incremental increases represent ever smaller percentage increases. Also, remember that I have eliminated FY 1996 from my calculation numbers.

Annualized Growth in Revenues and Earnings from FYE 1999 to FYE 2004

20% = $1.12 EPS for FYE 2004

- Gives a forecasted high price of $179.15 (160 * $1.12) and a forecast low price of $46.60 (41.6 * $1.12).

30% = $1.67 EPS for FYE 2004

- Gives a forecasted high price of $267.33 (160 * $1.67) and a forecast low price of $69.47 (41.6 * $1.67).

40% = $2.42 EPS for FYE 2004

- Gives a forecasted high price of $387.23 (160 * $2.42) and a forecast low price of $100.67 (41.6 * $2.42).

50% = $3.42 EPS for FYE 2004

- Gives a forecasted high price of $546.75 (160 * $3.42) and a forecast low price of $142.27 (41.6 * $3.42).

60% = $4.72 EPS for FYE 2004

- Gives a forecasted high price of $754.98 (160 * $4.72) and a forecast low price of $196.35 (41.6 * $4.72).

Sure, I could have continued the exercise and used the whole continuum of annualized growth rates. I am also aware that CREE is expected to grow EPS in excess of 90% from FYE 1999 to FYE 2000, but I think that kind of supports my contention that to average 60% a year for the next 5 years is a pretty strong standard to set. I also think that the future for CREE, while bright at the moment, is uncertain.

All constructive comments welcome! If you want to flame me for something in this post, please just put me in your penalty box and save everyone from my potentially caustic repsonse.

ZaksDad
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