Cree: Shining on the LED Lighting Market

The lighting market that is expected to be completely transformed years from now is currently worth $119 billion. There are many players in this industry who are fully aware that the penetration rate of a potential full scale LED lighting transformation is only 1%. Leading the way is Cree Inc. (CREE) and below is an excerpt of my interview with them.

Stockinvestingcoach.com: The very first time I encountered CREE was in an article five years ago that talks about disruptive technologies, as coined by Clayton Christensen, and its potential to change the market place. Modesty aside, how disruptive are the products of CREE then and at present looking forward?

Raiford Garrabrant: It’s quite a coincidence that you first encountered Cree five years ago, because that is right around the time I joined the company, and the reason I joined was my belief in the disruptive nature of LEDs in lighting.

Five years ago, using LEDs for general purpose white lighting was really just an idea. We could see the potential, but there was virtually no adoption of LEDs for general purpose white lighting. Today, we are seeing that potential turned into reality.

One example is the city of Los Angeles, which decided to replace 140,000 city street lights with LEDs (more information on that project is available here). We think LED adoption is still no more than onepercent of the lighting market, but it is starting to gain momentum.

Looking forward, we think the LED Lighting Revolution will continue, and Philips Lighting, one of the largest lighting companies in the world, if not the largest, predicts that approximately ninety percent of lighting will be LED based by 2020.

SIC: How big of a market are you looking at in dollar terms?

RG: The lighting market was $119 billion in 2007 according to The Freedonia Group.

SIC: That is a huge market! And who are your closest competitors? Are you threatened,or the market is so far too big for everybody?

RG: Our primary competitors are Philips Lumileds, Osram and Nichia. We think the market is big enough for Cree and our competitors to be successful, but competition does represent a real risk or threat to our business.

SIC: Your company is the company I am interviewing and I want to make sure that a ten year old kid will understand what your product is all about and visualize what it really is. Of course, we know about LED and other component products but can you tell us in simplest terms what your products are, where these things can be found? What is your main product?

RG: LED components are our primary product, and the simplest way to describe them is to say they are like tiny light bulbs that save energy and help the environment.

SIC: Financial constraints. Can you say that your financial standing with regards to being able to fund your future growth has already been taken care of in your share issuance this year? Where will you use these funds?

RG: We do consider ourselves to be in a very sound financial position as a result of our share issuance. With more than $800 million in cash and investments, we believe we can fund a substantial amount of growth. We intend to use the proceeds from the offering for anticipated capital expenditures of approximately $150 to165 million in fiscal year 2010 and additional future capital expenditure needs with the remainder being used for general corporate purposes, including working capital and potential strategic investments.

Comments

[David Shane]

So weird that this gets classed under "alternative energy." For one thing, it isn't an energy company. And usually when we use that term we mean something like "companies that save the environment, but do it in ways that are really expensive that you would never adopt if you didn't think we were all going to die from CO2." I don't think CREE qualifies. They make light bulbs. They make really good light bulbs. They have a product many people will love to buy on its merits. That's all.

2009 Nov 27 01:40 PM

[SlipperyWing]

Agree that CREE really isn't a pure alternative energy company. Their products merely enhance the effort to conserve energy; still relying on the grid to be effective.

I've been in CREE for about six months or so and have enjoyed the ride. The company is on solid foundation and expanding in the market. A quick look at the balance sheet reveals no debt as well, and in times like these that stat is particularly attractive.

2009 Nov 27 08:35 PM

[redduke]

There are far more competitors than mentioned in the article. Beside Japanese, Korean, Taiwanese and Chinese also rush to create domestic LED producers. In my view, it will not take long that LED will be commoditized.

CREE is a buy-out target. GE and Siemens may be the buyers.

2009 Nov 28 06:27 PM

[adt]

I find this a dilema as well. Smart Grid Enablers and Lighting are not Utilities and they are not Energies as such. They are however a Clean-tech or Clean Resource. To that end I tend to lump them in with Renewables as a Group called Clean Resources and Renewable Energies or Clean-tech Resources and Renewable Energies, inclusive of the Constructors of the plants and grids that facilitatte use of the resource (light and water) and energies.

As an adjunct, the Clean Resource sub-group may even include Rare Earth Processors as Rare Earths are used in many Clean applications such as the Lighting and Hybrid and Electric vehicles.

Happy Grouping!

2009 Nov 28 08:11 PM

[SOLAR SARMA]

Link of Bureau of Street Lighting of LA city is linked incorrect.Correct one is this: www.bsl.lacity.org/

2009 Nov 28 10:28 PM

[erniem]

LED lighting needs to become a couple of magnitudes of order cheaper before it is an alternative lighting source. LA was nuts.

2009 Nov 29 12:32 PM

[Bryan Gomez]

For the complete interview on cree,

www.stockinvestingcoac...

2009 Nov 29 08:30 PM

[mws]

Cree Inc. (CREE) closed today --12/01/09 -- at $50.51. Some key stats for CREE are*:

Forward P/E: 35.57
PEG Ratio (5-year expected): 2.14
P/B: 2.88
P/S: 8.32
P/CF: 23.3
Div. Yield: 0%

*Key Statistics provided by Yahoo! Finance and Morningstar.

Cree Inc. is currently a bit too rich for my blood. Morningstar currently lists Cree's share price far in excess of its "Fair Value Estimate" and its "Consider Buying" price.

Still, to be fair, Morningstar has a glowing (pun intended) "Analyst Report" stating that, "... Cree is a technology leader and still has tail winds that should help drive growth..."

I suppose it depends how you perceive the value of the company in relation to its key statistics versus its long-range potential.

2009 Dec 01 05:44 PM

[Bryan Gomez]

The concern regarding Cree's pricey stock is reasonable. But as always, growth stocks are for people that buy growth. We can enumerate a lot of past superstars that had always been considered expensive and yet continue to go up. Just allocate properly.

2009 Dec 02 02:36 AM

[mws]

<< Just allocate properly. >>
Agreed... always a sound strategy. By the way, thanks for a thought provoking article.

-- mws --

On Dec 02 02:36 AM Bryan Gomez wrote:

> The concern regarding Cree's pricey stock is reasonable. But as
> always, growth stocks are for people that buy growth. We can enumerate
> a lot of past superstars that had always been considered expensive
> and yet continue to go up. Just allocate properly.

2009 Dec 03 05:32 PM