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No. of Recommendations: 15
Cree's Balance Sheet was skimpy and Cash Flow statement non-existant so there are a lot of holes in the spreadsheet.

Comments follow.

Cree Inc.
Qtr. Ending Sep-99 Dec-99 Mar-00 Jun-00 Sep-00 FY99 FY00
TTM Revenue 70.983 81.759 95.252 108.562 125.343 62.401 108.562
TTM Net Income 14.636 17.432 23.017 30.520 38.621 12.448 30.520
TTM NOPAT 12.459 15.261 18.557 23.888 29.165 10.493 23.888
TTM FCF -20.721 -21.634 -27.402 -15.803 -21.266 -15.803

Per Share Data
Earnings / Share $ 0.14 $ 0.17 $ 0.25 $ 0.32 $ 0.34 $ 0.41 $ 0.87
NOPAT / Share $ 0.13 $ 0.16 $ 0.17 $ 0.24 $ 0.25 $ 0.34 $ 0.68
FCF / Share $(0.07) $(0.13) $ (0.36) $ 0.11 $(0.70) $(0.45)
TTM Earnings / Share $ 0.44 $ 0.52 $ 0.63 $ 0.87 $ 1.03
TTM NOPAT / Share $ 0.38 $ 0.45 $ 0.51 $ 0.68 $ 0.78
TTM FCF / Share $(0.62) $(0.64) $ (0.75) $ (0.45)

Quarterly Growth
Revenue 4.1% 18.9% 19.0% 13.0% 12.8%
Receivables 5.0% 9.3% 33.0% -49.5% 61.1%
Inventory 1.9% 13.5% 53.7% 31.6% 13.3%
Payables -30.3% 13.4% 14.0% 103.3%
Earnings/Share 8.4% 22.6% 45.6% 31.6% 4.3%
NOPAT/Share 25.1% 24.7% 7.2% 42.1% 5.3%
FCF/Share -72.5% 78.3% 186.9% -130.3%

Annual Growth
Revenue 69.9% 76.8% 84.1% 66.4% 80.4% 41.9% 74.0%
Receivables 44.5% 52.6% 75.5% -22.9% 18.3% 53.6% -22.9%
Inventory 25.0% 35.5% 82.5% 133.8% 160.2% 56.7% 133.8%
Payables 8.8% 49.6% 44.4% 83.1% 38.6% 83.1%
Earnings/Share 52.6% 60.3% 113.2% 154.6% 144.9% 89.9% 111.9%
NOPAT/Share 50.6% 74.1% 74.1% 137.6% 100.1% 88.7% 96.7%
FCF/Share -35.8% 3.5% 43.4% -142.6% 435.6% -35.8%

Profitibility
Gross Margin 45.4% 54.9% 57.6% 54.5% 54.6% 45.3% 51.8%
Operating Margin 30.6% 32.5% 31.9% 38.6% 38.5% 25.9% 33.9%
NOPAT Margin 19.9% 21.1% 20.7% 25.1% 25.1% 16.8% 22.0%
Net Margin 21.8% 22.8% 30.4% 34.0% 33.6% 19.9% 28.1%
OCFM 36.0% 36.8% 38.2% 105.0% 32.6% 58.0%
TTM OCFM 37.6% 40.1% 38.8% 58.0%
Cash King Margin -11.1% -16.9% -44.4% 11.5% -34.1% -14.6%
TTM Cash King Margin -29.2% -26.5% -28.8% -14.6%
ROE 13.1% 13.2% 11.1% 10.5% 10.2% 9.5% 6.6%
-Net Margin 0.206 0.213 0.242 0.281 0.308 0.199 0.281
-Asset Turnover 0.563 0.557 0.418 0.347 0.312 0.428 0.223
-Leverage Factor 1.13 1.11 1.09 1.07 1.06 1.11 1.05
ROA 11.6% 11.9% 10.1% 9.8% 9.6% 8.5% 6.3%
ROIC 15.9% 17.1% 18.1% 19.8% 11.9% 14.9%

Financial Strength
Flowie 1.96 1.70 1.34 1.17 2.19 1.17
WCC 47 36 26 10 68 13
DSO 74 68 76 34 48 94 42
DIO 33 38 52 56 56 43 65
DPO 43 50 51 85 83 99
CCC 63 56 77 5 54 8
Total Debt to Equity 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Cash to Debt No Debt No Debt No Debt No Debt 101.86 No Debt
Net Cash 44.953 43.872 308.611 304.111 48.212 304.111

A/R looks unusually high. I think they're including interest receivables in that line. I'll ask Fran.

Inventory growth looks like it's under control finally.

Dilution hurt a bit more than I expected this quarter. Sequential growth in Revenue, Net Income and NOPAT were 12.8%, 11.4% and 12.6% respectively. EPS and NOPAT/share sequential growth were 4.3% and 5.3% because diluted shares outstanding grew ~7%.

Marv
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"Dilution hurt a bit more than I expected this quarter"

Could you explain more on this one Marv? What does it hurt and how does it affect shareholders? Thanks.

Dink
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No. of Recommendations: 7
A/R looks unusually high.

Actually, A/R look well in line with Cree's history. Last quarter, they had a sharp drop in receivables, which they never explained very well, so compared to last quarter it would seem that this quarter is out of line. However, look at DSOs for the past few quarters:

Q1 2001: 49
Q4 2000: 34
Q3 2000: 76
Q2 2000: 71
Q1 2000: 77
Q4 1999: 84
Q3 1999: 80

I think the market reaction is pretty typical of most participants' short term mentality. First, market didn't like the top line growth. While the top line growth rate has not begun to accelerate, the announcement of the ultra bright LED, coupled with the additional capacity coming online in the second half of the fiscal year, bode well for acceleration of growth later this year. The company cited reports that the new LEDs are as bright as sapphire, but much much cheaper. And you still have the blue laser and RF product potential a bit further out.

Also, the market is probably reacting to gross margins in the sense that they stopped growing. This is the first quarter in several that Cree's overall GM stayed constant, which looks to me to be the result of of somewhat greater ASP erosion than the company experienced last year. It doesn't help when CNBC reports that Cree guided margins lower, which they didn't do. It's pretty clear that they've had some trouble with 3-inch wafers (it was evident in last quarter's CC) but Hunter reported very good progress over the past few weeks and it sounded to me that they have come a long way in solving whatever issues they had.

While this quarter wasn't the blowout that is required to hold your own in these market conditions, I can't find any longer term justification for the sharp reaction of the market.

--fox


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Could you explain more on this one Marv? What does it hurt and how does it affect shareholders? Thanks.

Dilution makes your piece of the pie smaller. In a non-tech company, dilution is usually negigible (generally <1% per year). The way it hurts shareholder's is dilution will reduce EPS (or the way I analyze Cree, NOPAT/Share). Shares outstanding increased about 7% in one quarter which is a bit more than I was expecting.

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