With Cree (CREE, Financial) trading at just above 52 week lows, I decided to take a closer look into the company to see if it is an attractive investment opportunity. Here are five points I looked at while researching CREE:
Valuation: CREE’s trailing valuation metrics suggest that the stock is undervalued as they are all trading in the lower end of their 5 year ranges. CREE’s current P/B ratio is 1.0 and it has averaged 2.2 over the pas5 years with a high of 3.9 and low of 1.0. CREE’s P/S ratio is 2.6 and it has averaged 5.2 over the past 5 years with a high of 9.9 and a low of 2.6. CREE’s current P/E ratio is 26.0 and it has averaged 50.1 over the past 5 years with a high of 86.5 and low of 20.3.
Price Target: The consensus price target for the analysts who follow CREE is $32.50. That is upside of more than 40% and suggests that the stock is undervalued at these levels and has room to run.
Forward Valuation: CREE is currently trading at about $24 a share with analysts expecting that the company reports earnings of $1.17 in this fiscal year ending in June for a forward P/E of 20. Revenues are expected to jump 27%. Out of all of the companies listed in CREE’s 10-K as competitors, only one trades in the US, Avago Technologies (NASDAQ: AVGO). The stock is trading at about the $32 level and analysts expect the company to report earnings of $2.51 per share this fiscal year ending October for a forward P/E of 13. Revenues are expected to rise 3%. Using AVGO is a comp, it is inconclusive to say if CREE is undervalued or not because of the different expectations in revenue growth.
Pricing: One of the main reasons the stock has been falling is due to the pricing on its products. Numerous companies increased production for LED products as demand for end products was rising, however, that has led to an oversaturated market and lower pricing.
Earnings Estimates: CREE has beat earnings estimates just once out of the past 4 quarters. Notably, all of the earnings came in within 3 cents of analyst expectations. It seems like analysts have a good idea on CREE’s operations and positive surprises to push the stock higher will be limited.
Price Action: CREE has really struggled this year, falling from nearly $60 a share to just above $20 a share. The low was reached in late December but the stock has bounced since then, up more than 15% to its current level of nearly $24 a share. The stock is trading below its 200 day moving average, which sits just under $32, and its 50 day moving average, which sits at about $24.50. The 50 day moving average has served as a key resistance level over the past year as the stock tried to clearly break it 4 times but was unsuccessful. The $24 level also has resistance from the late fall and early winter time frame after the stock tried to penetrate that level on the downside but was unsuccessful. On the downside, the $22 level should provide decent support followed by $20.
Conclusion: CREE seems undervalued here as analysts and its trailing valuation metrics suggest that it is deeply undervalued. It could be worth a shot here but be prepared to average in, as it does not look like the bottom in the stock has been set in place. The trend lower is very strong and is the dominate one on the charts even though there may be temporary upswings in the stock.
