Ironically, this version is from Barron's 'Hot Research' column (sorry):
Cree (CREE: Nasdaq)
By Wunderlich Securities ($60.41, June 8, 2010)
WE ARE INITIATING COVERAGE of Cree (ticker: CREE) with a Buy rating and an $85 price target on the shares. The world of lighting is finally on the verge of being completely and utterly replaced by solid-state lights and Cree is leading the industry to make this happen.
With today's focus on energy efficiency and the dramatic reduction in demand that can be achieved with conservation alone, using solid-state light-emitting diode (LED) based light is considered by many to be the single most rational response a consumer can make. But replacing light bulbs with LEDs is only the first order response. The second is the replacement of all light fixtures, which opens up a whole new market.
Replacement of light bulbs with solid-state lights is only the first response. The second one is the replacement of all the light fixtures and the lights in them. With solid-state lights that never need to be replaced, why not design them without a socket? There will come a day when one walks into a Home Depot (HD) and all lights will come with LEDs.![[CREE]](http://barrons.wsj.net/public/resources/images/ON-AO407_BHOTCR_NS_20100608143937.jpg)
There are five billion light bulbs in the U.S. and all need to be replaced. That is a $50 billion market. There is a $500-billion-plus market to replace all the light fixtures to eliminate the light-bulb socket. This is a redesign of every single light-bulb holding fixture in the world, including oven lights, refrigerator lights, car-interior lights, table lamps and overhead lights.
Cree has been on the forefront of making solid-state lighting a reality since at least 1994. It has relentlessly pursued the goal of solid-state lights and it now has massive consumer appeal because solid-state lights require no sacrifice in light quality, save 80% of energy cost, and never need replacement. Consumer electronic customers who need high-quality light that will last longer than the product it's placed in choose Cree product over generic LEDs.
Cree already has $998 million in cash and no debt. We project cash balances will rise through 2012 to $1.4 billion.
The size of the market and the protection Cree has on its IP make the difference in our confidence that it can grow dramatically. We assume growth rates will drop from 40% to 20% for the near term before declining further after 2014. Our discount rate is only 10%, but our confidence in Cree is supported by it executing on plan since 1994.
We believe the lighting industry is about to change in a fundamental way and that Cree is one of the most highly concentrated ways to invest in this trend. For a century or more, lighting has been part fixture and part light bulb. This was necessary because the light bulb itself would ultimately fail catastrophically; that is, it would stop working and require replacement.
While the market to replace existing light bulbs with more efficient ones is immense and growing, an even greater opportunity has emerged, which is the merger of the light bulb and the fixture. With the availability now of high-quality LED or solid-state lights that will last upward of three decades, there is no longer any need for lights to have sockets. We project that all future lighting will be made with an integral and nonreplaceable LED, thus doubling the lighting market, and Cree's opportunity is in selling LED chips and components that are the light-bulb equivalent as well as its own lighting products.
Further, LED-based lights do not require any special equipment to develop or manufacture, thus opening up entrepreneurial opportunities around the world. One day soon, one will walk into Home Depot to pick out a chandelier or a table lamp and it will come with its own LED light source. In a matter of years, the idea of replacing a light bulb will seem as old fashioned as a rotary telephone.
We used a discounted-cash-flow method to arrive at our $85 target. To get there, we are assuming 20% earnings-per-share growth through 2012 with growth slowing after that. Our discount rate is 10%, which might seem aggressive, but we would argue that the risk is a lot lower than investors believe. We believe the recent pullback in share price provides an excellent entry point into this high-quality company.
-- Theodore O'Neill
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