Cree at a crossroads
Triangle Business Journal
A turbulent eight months in which Cree's share price fell by half and executives twice cut sales forecasts has analysts and investors wondering - is the company a takeover candidate?
"That's a completely legitimate possibility," agrees Harsh Kumar, a research analyst with Morgan Keegan. "Does it make sense? Absolutely."
And almost everyone in Cree's marketplace believes the company is cheap right now - with an enterprise value of about $1 billion and a cash reserve of about $350 million. Observers say a private equity firm or a conglomerate could come in with a $1.8 billion to $2 billion offer if they believe in the Cree story. That's a big enough premium for Cree shareholders and board members to take notice of the offer.
That puts Cree CEO Chuck Swoboda and his management team under notice. For their part, they need to reverse the trend in Cree's revenue, which in recent years has been gnawed away by competitors from all over the world. If Swoboda is successful, a fattening stock price followed by a robust growth in the company's market cap most certainly would make Cree too expensive to buy.
Swoboda has tried to calm investors by promising to shave costs in the company's light-emitting diode, or LED, manufacturing business, primarily at facilities in Durham and Research Triangle Park.
A source familiar with the situation says Cree in December laid off about 200 temporary workers at its local operations and ordered a one-week mandatory shutdown of manufacturing operations - all in an effort to pare down inventory levels.
Chris James, vice president of marketing for Cree, responded to written questions with an e-mail reply. "We feel these questions fall within the scope of topics governed by 'blackout' period guidelines. (The) questions touch on topics we will cover on the (quarterly earnings) call, and prefer to release a unified story."
For Cree, the numbers tell an alarming tale.
On Jan. 18, when Cree releases its quarterly financials, analysts expect the company to report revenue of $89.90 million to $92.49 million, about 14 percent lower than the $105.64 million the company generated during the same quarter last year. Earnings per share is expected to be in a range of 4 cents to 14 cents compared to 26 cents in the same quarter in the previous year.
For fiscal 2007, analysts expect Cree's revenue to end up at $380 million, about 10 percent lower than the $424 million it generated in fiscal 2006. Earnings per share is expected to decline to 32 cents in fiscal 2007 compared to 92 cents in fiscal 2006.
Assault from abroad
Industry watchers say Cree's bread-and-butter product - LED units that power keypads and screens on electronic devices, instrument panels on vehicles, and the like - has been mauled by Asian manufacturers that have begun matching Cree's quality but at much lower prices.
"Cree did not get the business they had expected, and in addition they lost some share to Taiwanese competitors that cut prices significantly," Pierre Maccagno, an analyst with Needham Research, wrote in a December report.
Kumar says Taiwanese manufacturers are so eager for business that they are willing to make sales at little or no profit - something Cree is loathe to do. Kumar does not own shares in Cree, nor does his family. Morgan Keegan does not have an investment banking relationship with Cree.
With all the competition, the market is being flooded with LED options.
Swoboda has described Cree's poor quarters as a transition period for the company. "The next few quarters are difficult to forecast and our results will be heavily dependent on what happens with overall high brightness LED market demand," he told analysts during the company's August earnings conference call.
He expects Cree's business to improve during the first six months of 2007 - an assurance that's not convincing to some large shareholders, who point out that the company's share price is 35 percent below what it was when Swoboda became CEO in June 2001.
Cree's share price "tells you that there is probably low confidence in management," says David Carlsen, a portfolio manager for Kornitzer Capital Management, which owns about 2.3 million shares of Cree stock, or close to 3 percent of the company's outstanding equity.
"We think they have good assets in potentially a large marketplace and strong financial strength. Whether they execute or not is yet to be seen," says Carlsen.
"Quite frankly, the company's credibility is on thin ice," says Kumar of Morgan Keegan. "We don't like companies that have decelerating earnings. The company has not been very accurate in being able to forecast its own financials. They've missed their own targets one after another."
A Cree representative said Swoboda and other executives would be unavailable for comment.
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