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Cree, Inc.April 7th, 2009
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Outline
• Trip Description• LED Lighting Industry• Cree, Inc. Profile• Competitors• Leadership• Financials• Valuation
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TRIP DESCRIPTION
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Trip Description
• Observations
• Presentation
• Questions
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LED LIGHTING INDUSTRY
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Lighting Industry
• 75b USD Global Industry
• LED’s Make Up 7% of the Industry– Expected to 28% /year
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LED Lighting
Advantages• Consumes fewer
watts/lumen– More energy efficient
• Last longer– Fewer replacements– Lower replacement costs
• Wider spectrum of light– Produce whiter light
• Esp. for outdoor use
Weaknesses• Initially more expensive
– 23.3x more than incandescent bulbs
– 11.7x more than compact florescent bulbs
• Current models often do not seem as bright
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Lighting Market Growth
2008 2009 2010 2011 2012 20130
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20
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50
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90
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Lighting
LED Lighting (Projected Rate)
LED Lighting (Historical - 2008 Rate)
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LED Market Growth
2008 2009 2010 2011 2012 20130
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4
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LED Lighting (Pro-jected Rate)
LED Lighting (His-torical - 2008 Rate)
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University Lights
• Salesman did not personally recommend LED lights– Too dim in showroom– Too expensive– Compact florescent better
value for general applications
• LR6 was part of general overhead lighting display
• Fixtures were in unmarked corner
• Only one small display in back corner
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CREE, INC. PROFILE
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Company Profile
• Cree, Inc. (CREE)– Founded 1987– Employees: 3,168– 7 Corporate Locations in 2 Countries– Revenue: 493.3 m– Net Income: 33.4 m– Market Cap: 2.26 b
• World leader in LED light manufacturing by Market Cap
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Market Position
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5 Forces Analysis
Supplier Power: Low to Moderate
Substitutes: Many
Barriers to Entry: High
Buyer Power: Low
Competition: Moderate
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Products
• LED Products– LED Chips– LED Components– LED Lighting Solutions
• Materials Products– SiC Wafers– Bulk Materials Used for Gemstones
• Power and RF Products– Power Devices– RF Devices
LED Products84%
Materials Products
6%
Power and RF Products
4%
Government Contract Funding
6%
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LED Products
• LED Chips– Blue and Green chips made of GaN and SiC
Substrate materials– Can be used to make white LEDs
• LED Components– Like LED Chips, but are more finished goods
• LED Lighting Solutions– Consumer products available for sale– LR6, LR4
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Materials Products
• SiC Wafers– Electronic components for wholesale
• Bulk Materials Used for Gemstones– SiC crystals are used as diamond substitutes
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Power and RF Devices
• Power Devices– SiC power devices transmit electricity for electrical
components• RF Devices– SiC or GaN RF devices are smaller and more
expensive than traditional silicon devices
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Government Contract Funding
• R&D Grants
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Revenue Breakdown
• 72% of Revenues are from Asia
• 28% from the Rest of the World
• Only 18% from United States
United States18%
Hong Kong33%
Korea (South)16%
Japan13%
Europe6%
Malaysia
6%
Taiwan4%
Other4%
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COMPETITORS
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Competitors
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Nichia Corp.
• Japanese• 5,100 Employees• Global• Mainly a B2B Company• Private
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Philips Lumileds Lighting Co.
• San Jose, CA• 470 Employees• Global• Largest LED
Manufacturer• Brightest LED Capability• Primarily B2B• Private
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Toyoda Gosei LED (Toyoda Gosei Co., Ltd.)
• Japanese• Public• Owned a Automotive
Conglomerate• Operates in Europe,
North America and Asia Pacific
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Juno Lighting (Schneider Electric)
• Owned by French Conglomerate Schneider Electric
• Headquartered in Chicago, IL
• Consumer Sales Focus• Multi-Brand Strategy
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Cooper Lighting (Cooper Industries)
• Owned by American Conglomerate Cooper Industries
• Headquartered in Atlanta, GA
• Consumer Sales Focus• Multi-Brand Strategy– Halo Brand
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Smaller Firms
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LEADERSHIP
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FactSet Mergerstat - Summary Report
Cree Inc. CREE 225447101 2232351 NASDAQ Stock Market Common stock * Double click on the deal for more details
Announce ($mm) Date Buyer Name Seller Name Unit Name Deal Size Deal Type
08-Feb-08 Cree, Inc. LED Lighting Fixtures, Inc. - 103.40 Acq 12-Mar-07 Cree Research, Inc. COTCO Holdings Ltd. COTCO Luminant Device Ltd. 199.99 Div-Unit
26-Jun-06 Cree Research, Inc. INTRINSIC Semiconductor Corp. - 46.00 Acq
12-Oct-04 INTRINSIC Semiconductor Corp.
Advanced Micro Device Solutions AB - - Acq
04-Aug-04 INTRINSIC Semiconductor Corp. Bandgap Technologies, Inc. - - Acq
25-Mar-04 Cree Research, Inc. ATMI, Inc. ATMI, Inc. /Gallium Nitride Substrates & Epitaxy Business/ 10.25 Div-Unit
21-Nov-00 Cree Research, Inc. Spectrian Corp. UltraRF 113.54 Div-Unit 11-Apr-00 Cree Research, Inc. Nitres Inc - 174.75 Acq
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Chuck Swoboda
• President, CEO, Board of Directors
• 8 Years at Cree before President
• Previously Employed by Hewlett-Packard– LED Development
Leader
• Marquette University Board of Trustees
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Insider Holdings (Net)
-200000
-150000
-100000
-50000
0
50000
100000
James E DykesClyde HoseinRobert Alexander IngramStephen Douglas KelleyJohn T KurtzweilJohn W PalmourFranco PlastinaCharles M SwobodaDolph W Von ArxHarvey A WagnerThomas H WernerNET HOLDINGS
2-Apr-0
7
26-Apr-0
7
20-May
-07
13-Jun-07
7-Jul-0
7
31-Jul-0
7
24-Aug-0
7
17-Sep-07
11-Oct-
07
4-Nov-0
7
28-Nov-0
7
22-Dec-
07
15-Jan-08
8-Feb-08
3-Mar-
08
27-Mar-
08
20-Apr-0
8
14-May
-08
7-Jun-08
1-Jul-0
8
25-Jul-0
8
18-Aug-0
8
11-Sep-08
5-Oct-
08
29-Oct-
08
22-Nov-0
8
16-Dec-
08
9-Jan-09
2-Feb-09
26-Feb-09
22-Mar-
090
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20
30
40
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Insider Holdings (Net)(Excepting Dolph W Von Arx)
-250000
-200000
-150000
-100000
-50000
0
50000
100000
150000
200000
James E DykesClyde HoseinRobert Alexander IngramStephen Douglas KelleyJohn T KurtzweilJohn W PalmourFranco PlastinaCharles M SwobodaDolph W Von ArxHarvey A WagnerThomas H WernerNET HOLDINGS
2-Apr-0
7
26-Apr-0
7
20-May
-07
13-Jun-07
7-Jul-0
7
31-Jul-0
7
24-Aug-0
7
17-Sep-07
11-Oct-
07
4-Nov-0
7
28-Nov-0
7
22-Dec-
07
15-Jan-08
8-Feb-08
3-Mar-
08
27-Mar-
08
20-Apr-0
8
14-May
-08
7-Jun-08
1-Jul-0
8
25-Jul-0
8
18-Aug-0
8
11-Sep-08
5-Oct-
08
29-Oct-
08
22-Nov-0
8
16-Dec-
08
9-Jan-09
2-Feb-09
26-Feb-09
22-Mar-
090
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20
30
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FINANCIALS
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FactSet Beta: .99
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DuPont Analysis
Asset
TurnoverReturn on
AssetsReturn on
EquityNet Income
MarginKLAC 0.56 8.3% 11.0% 14.2%LRCX 0.89 18.4% 29.7% 17.8%ASX 0.65 5.0% 8.8% 6.5%ATE 0.55 4.9% 5.8% 9.1%VSEA 1.19 13.3% 18.2% 11.8%NVLS 0.62 -6.0% -8.3% -11.4%Average 0.74 7.3% 10.9% 8.0%CREE 0.38 2.8% 3.1% 6.8%
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Ownership
• Shares: 88.495 million• Short Interest Shares: 15
• Institutional Ownership: 85.16%– Generally Owned by Medium Turnover Portfolio
Firms• Insider Ownership: 10.21%
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VALUATION
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Multiple Valuation
Valuation Book Multiple 23.70 Earnings Multiple 12.63 Sales Multiple 13.56 CF Multiple 27.47 Current Price 25.58
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Conservative Growth Model
• WACC: 10.75%• Terminal Value Multiple: 10x• Tax Rate: 22.5%• Revenue Growth:
– 2009: 12.8%– 2010: 9.8%– 2011: 13.8%– 2012: 10.0%– 2013: 10.0%
• EBIT Growth:– 2009: 41.3%– 2010: 30.1%– 2011: 48.3%– 2012: 20.0%– 2013: 20.0%
• Other Factors Equal to Revenue Growth
Equity Value Per Share9.00x 9.50x 10.00x 10.50x 11.00x19.74 20.47 21.19 21.92 22.65 19.40 20.11 20.82 21.53 22.24 19.07 19.77 20.46 21.16 21.85 18.75 19.43 20.11 20.79 21.47 18.44 19.10 19.76 20.43 21.09
Current Price: 25.58
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Aggressive Growth Model
• WACC: 9.5%• Terminal Value Multiple: 13x• Tax Rate: 22.5%• Revenue Growth:
– 2009: 12.8%– 2010: 9.8%– 2011: 13.8%– 2012: 20.0%– 2013: 20.0%
• EBIT Growth:– 2009: 41.3%– 2010: 30.1%– 2011: 48.3%– 2012: 35.0%– 2013: 35.0%
• Other Factors Equal to Revenue Growth
Equity Value Per Share12.00x 12.50x 13.00x 13.50x 14.00x25.25 26.02 26.79 27.56 28.33 24.78 25.53 26.29 27.04 27.79 24.33 25.06 25.80 26.53 27.27 23.88 24.60 25.32 26.04 26.76 23.45 24.15 24.86 25.56 26.26
Current Price: 25.58
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Reasons for Premium
• Particular analysts may have higher growth rates
• Seen as a possible take-over target–
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Summary
Current Price: 25.58
Valuation Book Multiple 23.70 Earnings Multiple 12.63 Sales Multiple 13.56 CF Multiple 27.47 Mean Analyst Target Price 23.57 Conservative WACC DCF 20.46 Aggressive WACC DCF 25.80 Average 21.03
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