Cree 'Picking Up Momentum' After M&A Deal, Goldman Sachs Upgrades From Sell

The case for selling Cree, Inc. CREE's stock no longer applies as the manufacturer of lighting products is "picking up momentum," according to Goldman Sachs.

The Analyst

Goldman Sachs' Brian Lee upgraded Cree's stock rating from Sell to Neutral with a 12-month price target raised from $19 to $39.

The Thesis

Cree on Tuesday acquired  most of Infineon's Radio Frequency Power Business for more than $400 million in a deal which signals management's transformation is moving faster than previously expected, Lee said in a note. The acquisition is expected to add 25 percent to Cree's out-year EPS, but perhaps more notably, the company will gain more than 70 engineers from Infineon along with various intellectual properties as part of the deal.

Since being included in Goldman Sachs' "Americas Sell List," shares of Cree gained more than 50 percent versus a 30 percent gain in the S&P 500 index, the analyst said. The underperformance in the analyst's bearish stance was attributed to the company shifted from a historical LED and Lighting company to a higher-growth SiC market.

Price Action

Cree's stock is trading at a multiple seven turns above Cree's 10-year average, Lee said, but it's also somewhat inline with its 15 times to 22 times range the stock traded at in 2007 and 2013 when expectations of secular growth were high. As such, investors are encouraged not to be "chasing" the stock at current levels but the potential to become more constructive on the stock is more apparent now than it has been in the past.

Shares traded higher by 2.6 percent Wednesday to $42.88.

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