cree - sterneagee - jul10 - dominating technology

8/8/2019 Cree - SterneAgee - Jul10 - Dominating Technology

http://slidepdf.com/reader/full/cree-sterneagee-jul10-dominating-technology 1/13

Important Disclosures regarding Price Target Risks, Valuation Methodology, Regulation Analyst Certification,Investment Banking, Ratings Definitions, and potential conflicts of interest begin on Page I of the Appendix Section.

800 Shades Creek Parkway Suite 700 Birmingham, AL 35209 205-949-3500Sterne, Agee & Leach Inc. is Member NYSE, FINRA, SIPC

Earnings Summary

FYE Jun 2010E 2011E 2012E

EPS & P/E Summary

2010E 2010 Previous 2011E 2011 Previous 2012E 2012 Previous

EPS: Q1 $0.30 -- $0.53 -- $0.68 --

Q2 $0.38 -- $0.56 -- $0.73 --

Q3 $0.47 -- $0.56 -- $0.75 --

Q4 $0.50 -- $0.60 -- $0.81 --

Full Year $1.66 -- $2.26 -- $2.98 --

P/E Ratio: 39.7x -- 29.2x -- 22.2x --

Fiscal Year Ends Jun

Rating: Buy

Price: Close $66.07

Price Target: $112

52-wk Range: $26.38-$83.38

Market Capitalization (M): $7,175.3

Shares Outstanding (M): 108.6

Avg. Daily Vol. (000): 3,065.3

Enterprise Value: $5,632.5

Consensus EPS Current Year: $1.67

Consensus EPS Next Year: $2.26

Insider Holdings: 4.3%

Institutional Holdings: 85.1%% Float Interest: 11.5%

Price/Book Value: 3.7x

Andrew Huang

(415) [email protected]

July 8, 2010 | 13 Pages

CREE INC. (NNM: CREE)

DOMINATING TECHNOLOGY & SHARE IN GENERAL

LIGHTING - TODAY & TOMORROW - INITIATING COVERAGE

WITH A BUY

Sizing The General Lighting Market… The general lightingmarket is viewed as the “Holy Grail” for the LED industry because of its massive size and low levels of penetration. In2009, we estimate there were roughly 37 billion general lightingsockets around the world and cumulative LED socket penetrationat 0.34%. By 2015, we estimate cumulative LED socket penetration will reach 13% which has significant implications for LED unit volumes. We believe the LED market for generallighting will increase from 409 million units in 2009 to more than20 billion units in 2015, implying a CAGR of over 90%.

Initiating Coverage With a Buy and $112 Target Price. Cree isthe technology and market share leader in LEDs for generallighting, which accounts for more than 50% of its total sales.Given the secular growth of LED adoption in general lighting, we believe Cree should be able to grow its earnings in the range of 30%-40% over the next five years. By the end of 2011, we believe the stock will be trading at 35x our CY12 EPS estimate of $3.19, implying a price target of $112.

A Big Fish In A Small Pond. In 2010, we believe 816 million LEDs will be used for the general lighting “pond,” compared to26 billion LEDs used for the backlighting “ocean.” However,from 2010 through 2015, we estimate LED unit growth for general lighting at 91% CAGR compared to backlighting at 39%.With Cree’s estimated 25%-30% share of the faster growinggeneral lighting “pond” and a two year technology lead over its peers, we believe Cree’s revenue growth will accelerate as the“pond” becomes an “ocean.”

LED Supply Chain

Company Report

R ATING: BUY



CREE INC. (NNM: CREE) July 8, 2010

INVESTMENT THESIS

We are initiating coverage of Cree with a Buy rating and a $112 target price. Our thesisis simple. By year 2015, we believe that 22% of the market for lighting products will be based on LED, which is far more conservative than the 50% estimate from PhilipsLighting. Based on our analysis, at that level of market adoption, we believe globallighting socket penetration will reach 13% or 5.8 billion sockets out of 44.3 billionworldwide. Our 2009 base case assumes a mere 0.35% penetration, which highlights notonly how early it is in the cycle, but also how much longer there is to go.

To achieve the 13% penetration by 2015 for general lighting implies a significant ramp inLED unit volumes. Given our view that Cree is the market share and technology leader in LEDs used in general lighting, we believe Cree should be able to grow its earnings inthe range of 30%-40% over the next five years, which is consistent with its five-year historical average multiple of 36X forward 12 month EPS.

We believe that 18 months from now (the end of 2011), the stock will be trading at 35xour CY12 EPS estimate of $3.19, implying a price target of $112. As is the case with anyhigh multiple stock, it is unlikely that it will straight-line to our target. Rather thanattempt to predict precise entry and exit points, we feel comfortable taking the long-termview and believe that Cree’s leadership position in a secular growth industry will bringthe stock to our target and beyond.

INVESTMENT POSITIVES

General Lighting Presents Significant Volume Opportunities Over the Next 5 Years. Based on our general lighting model shown in Exhibit 1 below, we believe LED unitvolumes for general lighting will grow at a 5-year CAGR of more than 90% between2010 and 2015. Assuming ASP erosion of 20%-25% per year, this should translate toindustry revenue growth of 47% per year. As the market share leader for LEDs ingeneral lighting (we estimate Cree’s share at 25%-30%), we believe Cree has enormous potential for revenue growth.

Exhibit 1. General Lighting Market (2009-2015)

CAGR

2009 2010 2011 2012 2013 2014 2015 '10-'15

GLOBAL LIGHTING SOCKETS (Units) 36,682 37,834 39,029 40,268 41,554 42,886 44,267 3%Y/Y % - 3% 3% 3% 3% 3% 3%

Number of LED Sockets Exiting the Year (Units) 125 170 284 569 1,259 2,782 5,817 103%Y/Y % - 36% 67% 101% 121% 121% 109%

Number of LED Sockets Added in the Year (Units) 18 45 113 286 690 1,523 3,035 132%Y/Y % - 153% 149% 152% 141% 121% 99%

Average Number of LEDs/Socket 22.7 17.9 14.6 11.4 9.4 7.8 6.7 -18%Y/Y % - -21% -19% -22% -18% -16% -14%

Total Number of LEDs (Units) 409 816 1,651 3,257 6,476 11,949 20,480 91%Y/Y % - 100% 102% 97% 99% 85% 71%

Source: Sterne Agee estimates.

Dominant Share In General Lighting. We often hear bears talk about the competitionout of Asia taking share from Cree. At the 2010 Light + Building Show in Frankfurt, weestimate that Cree had 35% share of the LED products on display. At the 2010 Lightfair Show in Las Vegas, we estimate that Cree had 50% share of the LED products ondisplay. At the 2010 Guangzhou International Lighting Exhibition, we would not besurprised if Cree had 30% share of the LED products on display. We believe Cree isselling its LED products to all the major lighting companies around the world, whether itis selling LED chips, LED components, or even, LED fixtures. We also believe Cree isalso selling its LED products to small startups seeking to enter the market. By selling to both the established incumbents and new startups using LED technology to enter thelighting market, Cree will benefit in either scenario.




Success in General Lighting Driven By Technology Leadership. Over the past threeyears, Cree has made significant progress not only increasing the light output of its LEDs but also improving its efficacy. The implication of higher efficacy is that an LED cangenerate more light with less power, which results in greater energy savings. As recentlyas 2006, the most common complaint about LED lighting was that the LEDs were stillnot bright enough and that color stability was inconsistent. Today, we believe there arefew who would attempt to make that argument. We believe Cree’s pace of innovationrelative to its peers has enabled it to take share in general lighting. As an example,

Cree’s closest competitors are shipping LEDs with efficacies in the range of 100 lumens per watt while Cree already has products commercially available at 130 lumens per watt.Assuming LED brightness increases by about 15% a year, this implies that Cree is

about 2 years ahead of the industry average. As a result of this technology lead, asshown in Exhibit 2 below, general lighting as a percentage of its sales has been steadilyincreasing.

Exhibit 2. Cree – General Lighting as a Percentage of Total Sales Over Time

Lighting10%

Other 90%

FY07

Lighting50%

Other 50%

FY09

Lighting70%

Other 30%

FY11E

Source: Sterne, Agee estimates.

Secular Growth Offers Some Resistance to Recession. Despite the impact of a globalrecession, Cree’s LED revenue increased 30% in 2008 (the stock dropped 42% versus the NASDAQ down 40%) and 20% in 2009 (the stock increased 250% versus the NASDAQup 48%). We believe the revenue growth in those two difficult years is evidence thatLED adoption is secular.

Significant Investment in Channel Development and Marketing. We believe Creehas made substantial investments in developing the channel for its LED components for lighting over the past few years and will continue to do so in order to maintain itsleadership position in lighting. Since 2006, Cree has taken several steps to develop itssales channel, including: 1) hiring Robert Pollock from Lumileds as senior vice presidentof sales; 2) increasing its SG&A as a percentage of sales (8.4% in FY05, 9.5% in FY06,12.2% in FY07, 14.2% in FY08, and 13.3% in FY09), which includes more advertising intrade magazines and more marketing at trade shows; 3) adding Arrow, World Peace, andPremier Farnell as distribution partners; and 4) launching the Cree solutions provider network in 2008. For FY10E, we estimate SG&A as a percentage of sales will fall to11%. While this may be good for margins, without enough new products and sales andmarketing expense, future revenue growth could become a risk. This is why we believe

Cree’s management has clearly stated its intention to gradually increase its operatingexpenses (both R&D and SG&A) as a percentage of sales.

INVESTMENT CONCERNS

Technology – Will Cree Be Able To Sustain Its Leadership Position in General

Lighting? With several major electronics companies already committed to entering theLED market (Samsung LED, LG Innotek, AUO, and Chi-Mei) and several otherscurrently evaluating the LED market (Panasonic, Toshiba, and Sharp), many investorsthink that Cree will not be able to sustain its leadership position in general lighting. In particular, we believe Samsung LED and Toshiba present the greatest risk to Cree, giventheir substantial balance sheets and years of semiconductor manufacturing experience.




Our view is that this is a valid concern but not for another 3-5 years. We believe that: 1)over the next three years, these competitors will be focused primarily on LEDs for backlighting; 2) from the perspective of technology, it is significantly more difficult tomake an LED for general lighting than for backlighting (we estimate that Cree currentlyhas a 2 year technology advantage over its peers for general lighting); and 3) the lightingmarket is much more fragmented than the computer or TV markets.

Litigation – A Forthcoming Litigation Nightmare? Nichia and Seoul Semiconductor

were involved in one of the most well-known litigation disputes in the LED industry.The two companies sued and counter-sued one another in Korea, Taiwan, Japan, theU.K., Germany, and the U.S. This started in January 2006 and concluded with asettlement and cross-license in February 2009. LED volumes are now becomingmeaningful enough to attract many, large, new entrants. As a result, investors should beaware that there is potential for an all-out war that could make Nichia/SeoulSemiconductor look like a catfight. At issue is the intellectual property (related to LEDchip production, phosphors, and packaging), which is intimately held among the top-6LED companies in the world, including Nichia, OSRAM, Cree, Philips Lumileds,Toyoda Gosei, and Seoul Semiconductor. We would highlight Samsung LED and LGInnotek as the two most likely to try and join the club.

Margins – Can Cree Sustain Its Margins as a Tsunami of New Capacity Comes On

Line? With Aixtron and Veeco estimated to ship between 700 and 800 tools in 2010,there is a significant amount of new capacity coming on-line in 2011. Will Cree be ableto sustain its margins? This is a valid concern, but we think the answer is yes, becausewhile lower than normal ASP erosion clearly helps everyone in the industry, we think Cree’s gross margin improvement has been driven by favorable mix shift, improvingyields, higher volumes, the transition from 3” to 4” wafers (which is now complete), andto a lesser extent by more favorable pricing. Looking ahead, given that Cree’s grossmargins of 48% in the Mar-10 quarter are at the high end of its targeted range (mid- toupper-40s), we think gross and operating margins could tick down over time. Our modelcurrently reflects operating income growth of 49% in FY11, and more than 30% in FY12and FY13.

VALUATION

Over the past five years, Cree’s historical average P/E on NTM EPS is 36X, ranging from20X at the low end to over 66X at the high end. Given our view that the lighting marketis at only 0.45% penetration in 2010, heading to 13% in 2015, we believe it is too early toconsider sustainable multiple compression. Instead, we would argue that the stock’scurrent multiple on forward 12 month EPS is actually depressed and presents an excellententry point.

Exhibit 3. Cree – Historical P/E Multiple on Forward 12 Month EPS

10X

20X30X

40X

50X

60X

70X

6 / 2 4 / 2 0 0 5

9 / 2 4 / 2 0 0 5

1 2 / 2 4 / 2 0 0 5

3 / 2 4 / 2 0 0 6

6 / 2 4 / 2 0 0 6

9 / 2 4 / 2 0 0 6

1 2 / 2 4 / 2 0 0 6

3 / 2 4 / 2 0 0 7

6 / 2 4 / 2 0 0 7

9 / 2 4 / 2 0 0 7

1 2 / 2 4 / 2 0 0 7

3 / 2 4 / 2 0 0 8

6 / 2 4 / 2 0 0 8

9 / 2 4 / 2 0 0 8

1 2 / 2 4 / 2 0 0 8

3 / 2 4 / 2 0 0 9

6 / 2 4 / 2 0 0 9

9 / 2 4 / 2 0 0 9

1 2 / 2 4 / 2 0 0 9

3 / 2 4 / 2 0 1 0

6 / 2 4 / 2 0 1 0

P/NTM EPS AVG P/NTM EPS = 36X

Source: Sterne Agee estimates.




At $66, the stock is currently trading at 29X consensus EPS of $2.26 for FY11 (endingJune). Our target P/E multiple of 35X is consistent with our view that Cree should beable to grow its earnings in the range of 30%-40% over the next five years. By the end of 2011, we believe the stock will be trading at 35X our CY12 EPS estimate of $3.19, whichsuggests an 18 month target price of $112.

As is the case with any high multiple stock, it is unlikely that it will straight-line to our target. Rather than attempt to predict precise entry and exit points, we feel comfortable

taking the long-term view and believe that Cree’s leadership position in a secular growthindustry will lead the stock to our price target and beyond.

Longer term, we see further upside to EPS as LED adoption in general lighting continuesalong its multi-year upgrade cycle. By FY15, we do not think that EPS of more than$7.00 is unreasonable (30%-35% growth on FY11 consensus EPS of $2.30), whichshould translate to a stock price of over $200 by mid-2014. We believe the biggest risk

to our price target is general macro weakness. In 2008, the global recessioncompressed multiples across the board. Fundamentals played out accordingly, withCree’s Mar-09 quarter revenue down Q/Q, the first down quarter in two years. Sincethen, sequential revenue growth has resumed, with March-10 quarter revenue up 78%Y/Y.

COMPANY OVERVIEW

Source: Company reports and Sterne Agee estimates.

As shown above, Cree is the most vertically integrated LED company in the industry,making its own MOCVD tools, substrates, LED chips, LED components, and LED bulbsand luminaires – everything but its own chip and packaging tools. Cree is also unique inthat it is the only LED chip company to grow its epi on silicon carbide – every other company in the industry uses sapphire.

Cree started in the late 80s as a materials company focused on the development of silicon

carbide (SiC). Cree’s industry-leading blue and green LED chips are based on itsexpertise in growing Gallium Nitride (GaN) and other materials on silicon carbidesubstrates. In the 1990s, Cree sold its chips to LED packagers and benefited from theadoption of LEDs in mobile phones and automobile dashboards. In 2004, Cree started itsXLamp product line, which used its LED chips in Cree’s own proprietary package. InApril 2007, Cree acquired COTCO, which expanded its product line for smaller, packaged LEDs. In March 2008, Cree acquired LED Lighting Fixtures (LLF), whichfurther expanded its product line into LED-based light fixtures. Today, Cree enjoys aleadership position in all of its different product families, including LED chips, LED packages or components, and LED fixtures.

Customers. In fiscal 2009 (ended June), Seoul Semiconductor accounted for 13% of sales, Arrow Electronics accounted for 11% of sales, and Sumitomo, historically a 10%

customer, accounted for 8% of total sales. Sumitomo serves as a distributor for Cree’scustomers in Japan, some of which include Stanley Electric, Rohm, and CitizenElectronics. Seoul Semiconductor and Sumitomo’s customers manufacture LED packages or components with LED chips purchased from Cree. Given that Cree isfocused on keeping its chip business stable and growing the components and LLS businesses, we expect Cree’s current customer concentration to decrease over time.

Cree sells its LED components to manufacturers of lighting fixtures, lighting engines, and bulbs. In the future, we would not be surprised to see new 10% customers, which couldinclude Asian contract manufacturers which manufacture LED bulbs for some of the biggest names in the lighting industry. Arrow is one of the world’s largest semiconductor distributors in the world and primarily sells Cree’s XLamps. For its LED Lighting




Solutions products, Cree’s customers include electrical wholesalers, lighting showrooms,lighting specifiers (designers or engineers who specify lighting for a home, building, or project), electrical contractors, and national home builders.

Competition – LED Chips. Cree’s primary competition is Nichia, which primarily usesits chips for its own LED packages. However, we believe Nichia sells some of its chipsto other packaging customers in Japan, who in turn compete with Nichia’s LED packages. Cree’s LED chip competitors are primarily Epistar (based in Taiwan), and

Toyoda Gosei (based in Japan). Cree’s LED chips lead the industry with respect to brightness, reliability, and color consistency.

Competition – LED Components (High Brightness LEDs and XLamps). Cree’scompetitors for LED components include Nichia, Osram (Siemens), Citizen, StanleyElectric, Lumileds (Philips), Avago, Everlight, Rohm, Toyoda Gosei, SeoulSemiconductor, and Samsung LED. Cree’s LED components lead the industry withrespect to brightness, efficacy, reliability, and color consistency. Of these competitors,we believe Cree is most watchful of Nichia, the LED market share leader with about20%-25% market share.

Competition – LLS (LED Lighting Solutions). There are many LED fixtures in themarket, however, from the perspective of color and efficacy, few are able to compete

with fixtures made with Cree’s TrueWhite technology. Some competitors are the largest,traditional lighting fixture manufacturers in the world, all of which are in the middle of transitioning to LED technology. These include Acuity Brands, Cooper Lighting, andHubbell in the US, Zumtobel, Philips, and Schneider Electric in Europe, and Toshiba,Sharp, Panasonic, and Iwasaki Electric in Japan, as well as hundreds of others around theworld. Other competitors include new entrants to the lighting fixture market that havefocused on LED-based products, like BETA LED, Nexxus Lighting, and LightingScience Group. Lastly, LLS will also compete with makers of LED-based bulbs, some of which include Philips, GE, and Sylvania, as well as newcomers like CRS Electronics,LEDengin, and Nexxus Lighting. There are countless others, though we would highlightthat among the ones tested by the Department of Energy, many demonstrate lumen outputat roughly half the manufacturer’s claims.

PRODUCT OVERVIEW

CREE Re ve nue Bre akdown by Product (FY09) CREE Re ve nue Bre akdown by End Ma rke t (FY09) CREE Re ve nue Bre akdown by Ge ogra phy (FY09)

LED Chips29%

HighBrightness

LEDs23%

XLamps31%

LLS6%

Non-LEDRevenue

11%

Lighting50%

VideoScreens

25%

Backlighting10%

Handsets10%

Other 5%

Hong Kong &China38%

United States20%

Korea15%

Europe10%

Japan9%

Malaysia3%

Taiwan3%

Other 2%

Source: Company reports.

LED Components (51% of FY09 sales, 56% of FY10E sales). LED componentsincludes the power LEDs (the XLamp product family used primarily for general lighting)and high brightness LEDs (products typically used in digital signs and scoreboards).Power LEDs are characterized by their large die size (at least 1 mm x 1 mm, or roughly10x the size of a high brightness LED) and generate a significant amount of lightcompared to a high brightness LED.




LED Chips (32% of FY09 sales, 27% of FY10E sales). Cree also manufactures LEDchips based on silicon carbide technology, while the rest of the LED industry usessapphire to manufacture LED chips. Cree currently uses silicon carbide because it believes it can manufacture the brightest chips with that substrate. We believe Cree’sscientists are not necessarily married to any technology. Chips range in size from 0.2mm x 0.2 mm to 1.4 mm x 1.4 mm. The larger sized chips (> 1 mm x 1 mm) are used in power LEDs. Blue LED chips are coated with a yellow phosphor in order to create whitelight. Cree will participate in the shift to LED backlighting for LCD notebooks, TVs, and

monitors through its LED chips, which are sold to packagers like LG Innotek, SeoulSemiconductor, Lite-On, and others.

LED Lighting Solutions (4% of FY09 sales, 6% of FY10E sales). Through itsacquisition of LLF (LED Lighting Fixtures), Cree’s LED-based fixtures have led theindustry with respect to brightness and efficacy for the past two years. Patented color mixing technology enables efficacies and a color rendering index (CRI) that aresignificantly higher than those of competitors, which rely on standalone, warm-coloredLEDs.

Silicon Carbide Wafers (4% of FY09 sales, 3% of FY10E sales). Cree manufacturessilicon carbide wafers and typically sells the wafers to companies that use them to makehigh power switching and microwave devices used in military applications. We believe

silicon carbide is an ideal substrate for applications (such as military) exposed to hightemperatures and radiation. Wafers are produced in 2 inch, 3 inch, and 4 inch sizes.

Other (4% of FY09 sales, 8% of FY10E sales). Cree also manufactures Schottkydiodes, which are used by power supply manufacturers to improve efficiency. Alsoincluded in Other is government R&D work.



CREE INC. (NNM: CREE)

LED Supply Chain Comps

PRICE* MARKET

COMPANY NAME TICKER Rating CCY 07/08/10 CAP** 2009 2010 2011 2010 2011 2010

CREE CREE BUY USD 66.07 6,552 0.98 2.06 2.48 110% 20% 32.1

AIXTRON AIXA-ETR BUY USD 21.90 2,760 0.49 1.77 2.29 259% 29% 12.3

VEECO INSTRUMENTS VECO BUY USD 37.59 1,379 7.91 68.99 65.87 772% -5% 0.5

RUBICON TECHNOLOGY RBCN - USD 32.51 613 0.61 1.15 1.50 - - -

SEOUL SEMICONDUCTOR 046890-KR BUY KRW 42,250 1,962 554 1,468 2,468 165% 68% 28.8

SEMCO / Samsung LED 009150-KR - KRW 147,500 8,862 7,295 8,436 9,928 16% 18% 17.5

LG INNOTEK 011070-KR - KRW 160,000 2,302 9,333 12,726 18,176 36% 43% 12.6

LUMENS 038060-KR - KRW 12,200 390 719 1,100 - 53% - 11.1

EPISTAR 2448-TW - TWD 89.50 2,079 5.40 6.00 6.65 11% 11% 14.9

EVERLIGHT 2393-TW - TWD 93.20 1,168 6.46 7.08 8.04 10% 14% 13.2

GROUP AVERAGE 159% 25% 15.9

* in local currency

** USD in mill ions

CALENDAR EPS* EPS GROWTH

Source: Company reports and Sterne Agee estimates.




LED SUPPLY CHAIN 2009 Total Sales Market Cap

Company Ticker Offering (US$ millions) (US$ millions)

Materials

Rubicon RBCN-US sapphire substrates $20 $514

Kyocera 6971-JP sapphire substrates $10,573 $15,442

Universal Display PANL-US organic LED materials $16 $674

Capital Equipment

Aixtron AIXA-DE MOCVD reactors $435 $2,471

Veeco Instruments VECO-US MOCVD reactors $380 $1,310

Taiyo Nippon Sanso 4091-JP MOCVD reactors $4,561 $3,071

Jusung Engineering 036930-KR MOCVD reactors $146 $527

Applied Materials AMAT-US MOCVD reactors $5,357 $16,374

Disco 6146-JP Laser dicers, grinders and polishers $509 $2,331

TOWA 6315-JP Molding equipment for LED packages $119 $199

Shinkawa 6274-JP LED packaging - wire bonders and die bonders $75 $260

ASM Pacific 522-HK LED packaging - wire bonders $610 $3,044

Kulicke & Soffa KLIC-US LED packaging - wire bonders $316 $462

Agilent Technologies A-US LED packaging - test $4,512 $10,277

LED IP

Rambus RMBS-US LED IP $113 $2,084

LED Chips and Components

Avago Technologies AVGO-US LED components $2,099 $5,008

Vishay Intertechnology VSH-US LED components $2,042 $1,579

Cree CREE-US silicon carbide substrates, LED chips, LED components, $648 $6,475

Micron Technology MU-US LED chips, LED components $5,464 $7,299

SEMCO / Samsung LED 009150-KR LED chips, LED components $4,767 $8,573

LG Innotek 011070-KR LED chips, LED components $2,610 $2,363

Seoul Semiconductor 046890-KR LED chips, LED components $621 $1,981

Lumens 038060-KR LED components $114 $380

EpiValley 068630-KR LED chips - $105

Lumimicro 082800-KR LED components - -

AU Optronics AUO-US LED chips, LED components $10,913 $7,596

Lite-On 2301-TW LED components, LED lighting fixtures $5,817 $2,435Chimei Innolux 3481-TW LED chips, LED components $5,150 $7,608

Epistar 2448-TW LED chips $402 $1,945

Everlight 2393-TW LED components $357 $1,056

Opto Tech 2340-TW LED chips $184 $383

Unity Opto 2499-TW LED components, LED lighting fixtures $149 $437

I-Chiun Precision 2486-TW LED lead frames $139 $271

Harvatek 6168-TW LED components $85 $194

Tekcore 3339-TW LED chips $80 $223

Huga Optotech 8199-TW LED chips $71 $227

Formosa Epitaxy 3061-TW LED chips $67 $423

Genesis Photonics 3383-TW LED chips $35 $172

Sanan Optoelectronics 600703-SS LED chips - -

Toshiba 6502-JP LED components $68,066 $20,882

Panasonic 6752-JP LED components $71,821 $25,884

Sharp Electronics 6753-JP LED components $27,376 $11,224

Showa Denko 4004-JP LED chips $7,285 $2,771

Toyoda Gosei 7282-JP LED chips, LED components $4,670 $3,330

Rohm 6963-JP LED components $3,497 $6,470

Citizen Electronics 7762-JP LED components $2,569 $1,839

Stanley Electric 6923-JP LED components $2,329 $3,047 Source: Company reports and Sterne Agee estimates.




Appendix Section, Page

APPENDIX SECTION

Company Description: Cree manufactures its own MOCVD tools, substrates, LED chips, LED components, and LED bulbs and

luminaires. Cree is the only LED company that grows its epi on silicon carbide rather than sapphire. Its blue and green LED chips

are based on expertise growing Gallium Nitride (GaN) and other materials on silicon carbide substrates. Cree's products are used in

general lighting (50%), video screens (25%), backlighting (10%), handsets (10%), and other (5%) applications. As a result of its

technology leadership, Cree has #1 market share in LEDs for general lighting.

IMPORTANT DISCLOSURES:

Price Target Risks & Related Risk Factors:With several major electronics companies already committed to entering the LED market (Samsung LED, LG Innotek, AUO, and ChiMei) and several others currently evaluating the LED market (Panasonic, Toshiba, and Sharp), many investors think that Cree will not be able to sustain its leadership position in general lighting. In particular, we believe Samsung LED and Toshiba present the greatesrisk to Cree, given their substantial balance sheets and years of semiconductor manufacturing experience.

Our view is that this is a valid concern but not for another 3-5 years. We believe that: 1) over the next three years, these competitorwill be focused primarily on LEDs for backlighting; 2) from the perspective of technology, it is significantly more difficult to make anLED for general lighting than for backlighting (we estimate that Cree currently has a 2 year technology advantage over its peers forgeneral lighting); and 3) the lighting market is much more fragmented than the computer or TV markets.

Valuation Methodology:Over the past five years, Cree's historical average P/E on NTM EPS is 36X, ranging from 20X at the low end to over 66X at the highend. Given our view that the lighting market is at only 0.45% penetration in 2010, heading to 13% in 2015, we believe it is too earlyto consider sustainable multiple compression. Instead, we would argue that the stock's current multiple on forward 12 month EPS isactually depressed and presents an excellent entry point.

At $66, the stock is currently trading at 29X consensus EPS of $2.26 for FY11 (ending June). Our target P/E multiple of 35X isconsistent with our view that Cree should be able to grow its earnings in the range of 30%-40% over the next five years. By the end o2011, we believe the stock will be trading at 35X our CY12 EPS estimate of $3.19, which suggests an 18 month target price of $112.

Regulation Analyst Certification:I, Andrew Huang, (415) 362-6143, hereby certify the views expressed in this research report accurately reflect my personal viewsabout the subject security(ies) or issuer(s). I further certify that no part of my compensation was, is, or will be, directly or indirectly

related to the specific recommendations or views expressed by me in this report.

Sterne, Agee & Leach, Inc. Disclosure Legend as of July 8, 2010:

Company Disclosure(s) – See Below

Aixtron AG (AIXA-ETR - XETRA): None

Cree Inc. (CREE - NNM): 1

General Electric Co. (GE - NYSE): 1

Seoul Semiconductor Co., Ltd. (046890-KRX - KOSDAQ): None

Siemens AG (SIE.DE - NNM): None

Veeco Instruments (VECO - NNM): 1

1. Sterne, Agee & Leach, Inc. makes a market in the shares of the subject company.

2. Sterne, Agee & Leach, Inc. has, over the past 12 months, managed or co-managed a public securities offering or provided other investment banking services for the subject company.

3. Sterne, Agee & Leach, Inc. has various security accounts open for the subject company.

4. Sterne, Agee & Leach, Inc. provides administration for 401(k) plans for the subject company.

5. Sterne Agee Financial Services, Inc. has clearing agreements with the subject company.

6. The Sterne Agee analyst who has active coverage on this company owns a position in the subject company.

7. Sterne, Agee & Leach, Inc. or its affiliates beneficially own 1% or more of any class of common equity securities of thesubject company.

Sterne, Agee & Leach, Inc.’s research analysts receive compensation that is based upon various factors, including Sterne, Agee &Leach, Inc.’s total revenues, a portion of which is generated by investment banking activities.




Appendix Section, Page I

Definition of Investment Ratings:

BUY: We expect this stock to outperform the industry over the next 12 months.NEUTRAL: We expect this stock to perform in line with the industry over the next 12 months.SELL: We expect this stock to underperform the industry over the next 12 months. RESTRICTED: Restricted list requirements preclude comment.

Ratings Distribution:Of the securities rated by Sterne, Agee & Leach, Inc., as of June 30, 2010, 48.7% had a BUY rating, 49.9% had a NEUTRAL rating,1.4% had a SELL rating, and 0% was RESTRICTED. Within those ratings categories, 2.04% of the securities rated BUY, 1.94%rated NEUTRAL, 0% rated SELL, and 0% rated RESTRICTED received investment banking services from Sterne, Agee & Leach,Inc., within the 12 months preceding June 30, 2010.

ADDITIONAL INFORMATION AVAILABLE UPON REQUEST: Contact Robert Hoehn at 1-212-338-4731.

Other Disclosures:Opinions expressed are our present opinions only. This material is based upon information that we consider reliable, but we do no

represent that it is accurate or complete, and it should not be relied upon as such. Sterne, Agee & Leach, Inc., its affiliates, or one or

more of its officers, employees, or consultants may, at times, have long or short or options positions in the securities mentioned herein

and may act as principal or agent to buy or sell such securities.

Copyright © 2010 Sterne, Agee & Leach, Inc. All Rights Reserved.

Sterne, Agee & Leach, Inc. disclosure price charts are updated within the first fifteen days of each new calendar quarter per FINRAregulations. Price charts for companies initiated upon in the current quarter, and rating and target price changes occurring in thecurrent quarter, will not be displayed until the following quarter.

Price Chart(s):

To receive price charts or other disclosures on the companies mentioned in this report, please contact Sterne, Agee & Leach, Inc. toll-free at (800) 240-1438 or (205) 949-3689.



STERNE, AGEE & LEACH, INC.

Founded in 1901, Sterne Agee has been providing investors like you with high-quality investment opportunities forover a century. During the early years, our founders prominently established themselves in the financial securitiesindustry in the southeastern United States. Today, we have expanded to serve all regions of the country. Sterne,Agee is headquartered in Birmingham, Alabama with offices in 22 states including Alabama, Arkansas, California

Florida, Georgia, Illinois, Kentucky, Louisiana, Maine, Massachusetts, Minnesota, Mississippi, Missouri, New Jersey, New York, North Carolina, Pennsylvania South Carolina, Tennessee, Texas, Virginia, and Wisconsin. Sterne Agee is one of the largesindependent firms in the country. Sterne, Agee & Leach, Inc. is a division of Sterne Agee Group, Inc., which also includes The TrusCompany of Sterne, Agee & Leach, Inc.; Sterne Agee Asset Management, Inc.; Sterne Agee Clearing, Inc.; and Sterne Agee Financia

Services, Inc.— www.sterneagee.com

EQUITY CAPITAL MARKETS ADMINISTRATION

Ryan Medo Managing Dir., Eq. Cap. Mkts. (205) 949-3623Robert Lake Vice President (205) 949-3624

David Lee Director, Equity Products (205) 949-3689Yan Chao Associate (205) 949-3622Chuck Carlisle Sr. Portfolio Analyst (205) 949-3571

EQUITY RESEARCH

Robert Hoehn Director of Research (212) 338-4731

CONSUMER

Apparel Retailing & ToysMargaret Whitfield SVP, Sr. Analyst (973) 519-1019

Jennifer Milan VP, Sr. Analyst (212) 763-8211 Jessica Gerberi Associate (212) 338-4784

Educational Services / Interactive Entertainment Arvind Bhatia, CFA Mng. Dir. (214) 702-4001

Luke Shagets Analyst (214) 702-4030

Footwear & Apparel Sam Poser SVP, Sr. Analyst (212) 763-8226

Kenneth M. Stumphauzer Sr. Analyst (212) 763-8287

Leisure & Entertainment David Bain Mng. Dir. (949) 721-6651

Sherry Yin Associate (949) 721-6651

Restaurants

Lynne Collier Mng. Dir. (214) 702-4045Philip May Analyst (214) 702-4004

ENERGY

Oilfield Services & Equipment David S. Havens Mng. Dir. (212) 763-8238

FINANCIAL SERVICES

Asset Management Jason Weyeneth, CFA SVP, Sr. Analyst (212) 763-8293

Banks & ThriftsJames M. Schutz Dir. of Fin. Ser. (864) 241-3384

Adam Barkstrom, CFA Mng. Dir. (800) 906-0577 Blair Brantley, CFA Analyst (800) 621-8635

Matthew Kelley Mng. Dir. (207) 699-5800

Mike I. Shafir SVP, Sr. Analyst (212) 763-8239

Matthew Breese Analyst (207) 699-5800

Edward D. Timmons SVP, Sr. Analyst (800) 203-5332

Ashby W. Price Associate (888) 477-9602

Brett Rabatin, CFA SVP, Sr. Analyst (877) 457-8625

Kenneth James Analyst (615) 760-1474

Peyton Green Mng. Dir. (877) 492-2663 Joe Maloney Analyst (615) 760-1468

Life InsuranceJohn M. Nadel Mng. Dir. (212) 338-4717

Dennis Zavolock Analyst (212) 338-4748

FINANCIAL SERVICES (CONT.)

Mortgage Finance & Specialty FinanceHenry J. Coffey, Jr., CFA SVP, Sr. Analyst (615) 760-14

Jason Weaver Analyst (615) 760-14

Property/Casualty InsuranceDan Farrell Mng. Dir. (212) 338-47

Nitin Chhabra Associate (212) 338-47

GLOBAL INDUSTRIAL INFRASTRUCTURE (GII)

ACME &Latin AmericaLawrence T. De Maria, CFA Director (212) 338-47

Ben Elias, CFA SVP, Sr. Analyst (212) 338-47

Building, Power & Water InfrastructureMichael J. Coleman, CFA SVP, Sr. Analyst (212) 338-47

Engineering and Construction

Chase Jacobson VP, Sr. Analyst (212) 338-47

Industrial ComponentsSamuel H. Eisner VP, Analyst (212) 338-47

Multi-Industry Nicholas P. Heymann Mng. Dir. (212) 338-47

Paul A. Dircks Analyst (212) 338-47

Jordan Calabrese Associate (212) 338-47

TECHNOLOGY

LED Supply ChainAndrew Huang Mng. Dir. (415) 362-61

Naghmeh Rabii Associate (415) 362-61

Semiconductors Vijay Rakesh Mng. Dir. (312) 525-84

Ryan Brookman Associate (312) 525-84

TRANSPORTATION, SERVICES & EQUIPMENT

Jeffrey A. Kauffman Mng. Dir. (212) 338-47

Sal Vitale VP, Analyst (212) 338-47

Kanchana Pinnapureddy Associate (212) 338-47

ADMINISTRATION

Carlo Francisco Supervisory Analyst (914) 434-34

Marianne Pence Mgr., Res. Admin. (205) 949-36

Nathan Mitchell Editor (205) 949-36

Elizabeth Koch Editor (615) 289-4

cree - sterneagee - jul10 - dominating technology

Documents