General Electric And Cree: 2 Ways To Profit From The LED Opportunity

| About: Cree, Inc. (CREE)

Cree (NASDAQ:CREE) has got off to a bright start in 2014 as LED lighting is taking off. The company has already gained more than 35% in the last one year and the momentum looks set to continue this year as well. Given the growth in the LED market, not just CREE, but players like General Electric (NYSE:GE) are also cashing in on the huge LED market.

Cree's strategy

Cree's CEO is also optimistic about the company's growth prospects. This is clearly seen in his statement issued along with the second-quarter results when he said;

"Our strategy is working, the business is growing and we've made great initial progress building the Cree brand."

Cree's awareness programs about its LED lights have helped it in acquiring new customers for both indoor and outdoor LED lighting. The awareness programs are aimed at educating probable customers with the advantages of LED lights, and this has helped Cree's sales.

Cree might not be up to the mark from analysts' point of view if we take a look at its recent quarter's performance, but its consistent growth in both top and bottom lines are good indicators for the long run. After taking a close look at its recent quarterly results, where Cree reported 20% growth in revenue and 54% rise in earnings, investors would expect more such performances going forward. The outlook for third-quarter revenue is in the range of $390 million to $420 million, a year over year jump of 17% at the mid-point.

Cree's innovation has always helped the company perform better than others in the industry, leading to consistent revenue growth. Energy saving is one of the most important parameters in LED lighting, and Cree's products are especially engineered to satisfy this. But, the price of LED lights has been a hindrance in the way of LED adoption. However, CREE has been successful in launching low-priced LED lights, and also the fact that incandescent bulbs have now been banned in the U.S. will help sales of Cree's LEDs.

Cree provides total LED solutions to customers, and a high level of vertical integration helps the company earn higher margins since lower component costs are an added benefit in the competitive LED market.

New products and pricing to drive sales

In the commercial lighting segment, Cree recently introduced the ZR series of LED fixtures that provide various advantages like higher performance, higher savings, and aesthetic improvements. The price of this product seems to be remarkably low, priced at $99, with a lifetime of 75,000 hours and it comes with a simplified installation procedure which saves labor cost. It also provides consumers with the benefit of an industry leading 10 year limited warranty period.

Recently, Cree also introduced the CXA series of LEDs for high intensity light applications. These lights are equipped with high density LED arrays that provide strong light without an increase in size of the light source. Lumen density has also been doubled in these LED lights. This product opens up a new market of spot lights for Cree that was not possible with earlier LED technologies.

Over time, Cree has been able to reduce prices due to better technologies and increasing production. As Cree's cost of production declines further due to economies of scale going forward, we can expect the company to further lower prices. So, Cree investors should always keep in mind that Cree is going all out to increase market share in the LED market, and it is following aggressive marketing moves. But at the same time, the company will be helped by lower pricing of products as it moves lower on the cost curve.

GE's moves

GE is a giant conglomerate that is looking to expand its market share in LED lighting. General Electric has been receiving accolades such as the Top Product Award for its LED scalable light. Such awards add to the brand value of GE's LED lights, and could help it land more customers.

GE provides lighting solutions using LED Lights for refrigeration purposes as well, a market that has not much been tapped by its competitors. GE's RV60 LED lighting system provides one of the best solutions for refrigerated display lighting. These are advantageous in terms of energy savings costs and better visualization of merchandise.

These LED lights have been favorites of various grocery stores and convenience stores, replacing the conventional fluorescent lamp. GE's LED refrigerated display lighting systems help store owners to reduce the energy costs and boost their profits.

The market size of the U.S. commercial refrigeration equipment business is $7.5 billion, and it is predicted to rise 4.6% every year to reach $9.6 billion in 2016. GE surely has an added advantage in this niche of the LED market, as it could tap this easily along with the conventional LED market that is expected to be worth $42 billion by 2019.

What's in it for investors?

GE and Cree are two different types of investment options. While Cree is purely focused on LED lights, GE is a diversified corporation with interests in different areas. Cree is positioned to benefit from the fast growing LED market, and this is why it has a high trailing P/E ratio of 62 as investors are counting on future growth.

On the other hand, GE trades at 18 times earnings, and LED lighting is just one cog in a large wheel since the company has interests in various other businesses such as finance and industrial. Thus, investors should decide on an investment in either of these two stocks on the basis of their risk profile. If you are looking to buy a fast-growing stock in a fast growing industry, then Cree is the one for you. But if you're conservative, then it is best to invest in a diversified company like GE which won't sink if its LED venture fails.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.