Glowing Brightly: Cree (CREE)

Glowing Brightly: Cree (CREE)

Share this post

When we last wrote about Cree in 2010, LED (light emitting diode) lighting was on the cusp of entering the mainstream, but LED lamps remained expensive (“$40 for a light bulb?!?”) and somewhat exotic. Today you will find Cree’s bulbs prominently displayed in Home Depot at a price point under $10 with a 10-year warranty, a life expectancy of 25,000 hours, and just 16% of the energy appetite of an equivalent incandescent bulb. Cree’s lamps are also 27% more energy efficient than compact fluorescents (CFLs) and don’t contain the toxic mercury found in their curly cousins. No wonder, then, that Cree’s sales are glowing brightly; since 2010, the company’s sales have grown by 60%. But profits haven’t kept pace due to a boom in LED manufacturing in China, similar to what was seen in the solar industry, which resulted in lower prices and squeezed profit margins. That trend turned around in the middle of 2012, and Cree has been boosting its margins since then, resulting in robust earnings growth.

CREE

While LED lighting is Cree’s most high-profile product, almost 60% of the company’s sales remain in LED components, chips, and materials, not lighting products. That includes the LEDs that backlight most flat-panel televisions, a market that drove Cree’s growth for years but has now flattened out. But the LED lighting market has tremendous growth ahead, as incandescent bulbs are quickly being phased out and the price gap between LEDs and CFLs is shrinking. Cree’s lighting revenues jumped 48% in the past fiscal year, while its other LED products revenues increased just 6%.

Cree will continue to be challenged to keep its margins healthy as the LED market explodes. Innovation and a sharp focus on costs will be required to keep the company in its leadership position, so the stock does carry some substantial risk. That is offset by the company’s sparkling balance sheet, which features exactly zero long-term debt.

Sustainability Profile

The potential sustainability impact of Cree’s key product lines could be profound. The U.S. Department of Energy estimates that LEDs will account for 36% of the general lighting market by 2020 and 74% by 2030. If the market hits those targets, the energy savings would be an astounding 300 terawatt hours, about equal to the annual output of 50 one-gigawatt power plants (as a point of reference, there are about 125 one-gigawatt or larger coal-fired power plants in the U.S. today). When these figures are extended to the entire globe, the potential energy savings and climate impacts are even more staggering.

Revenues:               $1.4 Billion
EPS:
2014E                     $1.75
2013A                     $1.32
2012A                     $0.95

Projected Annual Growth Rate: 16%
Dividend: Nil
52-Week High–Low: $76.00–$24.50
Risk: Moderate

Website: www.cree.com

Tags: , , ,