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Summary

  • Cree's pure-play nature and innovation has helped it outperform General Electric in the LED market.
  • Cree has a robust balance sheet with no debt and a solid cash position.
  • Cree's earnings are expected to grow rapidly going forward, making it a solid growth pick.

Cree (NASDAQ:CREE) is one of the leading players in the light-emitting diode (LED) industry, which is expected to be worth $94 billion by 2020. The company has posted good revenue and earnings growth in the past few quarters, but its shares now trade close to its 52-week low. Since Cree is making aggressive investments to grow its business, the company's guidance hasn't matched Wall Street estimates of late, leading to a decline in the share price.

However, since Cree is a LED specialist, the company's prospects are strong as the market is huge. In addition, the company has successfully warded off competition from the likes of General Electric (NYSE:GE) so far due to its efficient products, and looks like a better buy than GE in this market. Hence, Cree warrants a closer look as it could be a good buy near its 52-week low.

Attacking the market with innovative products

Cree is looking to take advantage of the increasing usage of LED lighting globally. To tap this market, the company is focusing on product innovation. Cree is looking to improve and refine its fixtures and bulbs to address customer demands in both the indoor and outdoor segments.

In line with its innovation strategy, Cree has introduced the SmartCast technology that can make an impact in the commercial lighting market. SmartCast is a self-programmable wireless lighting control system that incorporates both daylight harvesting and occupancy-sensing technologies into a single integrated platform. According to Cree, SmartCast delivers greater energy cost savings as compared to traditional lighting controls, paving the way for its adoption in the future.

In January, Cree introduced what it claims to be the brightest LED in the market with high color quality. Since Cree's LED products are already cost-effective, adding the brightest LED module to its portfolio will go a long way in enhancing its offerings.

Going forward, Cree is focusing on making its lights more energy efficient. So, the company has now introduced the LEDway HO series that delivers 50% energy savings as compared to 400 watt high-pressure sodium Roadway Luminaires. Cree has also introduced CXB High-Bay Luminaires that should reduce the need for energy wasting, high maintenance fluorescent and HID high bay luminaires. In addition, the CXB luminaires cut energy costs in half, while also eliminating maintenance costs.

Sizing up the peers

In the LED bulb segment, Cree's introduction of a new 75 watt warm and cool white replacement bulbs should drive revenue in the long run as consumers replace traditional bulbs with Cree's offerings. Moreover, since Cree's bulbs are cheaper than General Electric's, the company has an advantage. Cree's 40-watt warm white LED bulb costs just $8 (approx.) on Amazon. The bulb delivers 450 lumens and has 25,000 hours of claimed life. Also, the bulb consumes just 6 watt of power and delivers a color temperature of 2,700 Kelvin.

GE's bulb, on the other hand, is highly-priced at $25 on Amazon. However, it has higher wattage configurations of 7 watts and 9 watts. In addition, GE claims that this bulb will last for up to 15,000 hours, and deliver the same 450 lumens and 2,700 Kelvin as Cree's offering. So, GE's product is priced way higher than Cree and is not as efficient.

However, GE seems to be getting more serious about LED lighting. According to The Wall Street Journal:

GE Lighting introduces its most incandescent-like consumer LED portfolio yet, including more than 40 new LED products and fixtures, to meet consumer demand to adequately fill every socket in their homes with energy-efficient LED lighting.

From GE's 40-watt replacement LED, the world's first incandescent-shaped LED bulb to earn an ENERGY STAR(NYSE:R) rating, to today's third generation LED design, GE LEDs provide the same quality of light consumers love from GE's original incandescent.

However, GE has been late to the market where Cree's solution is already present. Moreover, a look at Cree's fundamentals will reveal that the company can continue making solid investments as it has a strong balance sheet in order to stay ahead of GE.

Solid fundamentals and valuation

Cree doesn't have any debt, while its cash position is very strong at $1.22 billion. Also, a current ratio of 6.76 indicates that it has enough liquidity to satisfy its obligations. The company has strong cash flow metrics as well. Cree's operating cash flow for the last twelve months is $290 million, while its levered cash flow is $122 million.

Even Cree's valuation appears to be quite attractive. While its trailing P/E looks high at 48 times earnings, the forward P/E is a very reasonable 25. Considering that Cree's earnings are expected to grow at a CAGR of 23% for the next five years, it looks like a solid investment.

On the other hand, GE, though a diversified player, isn't the best choice to profit from the LED market. GE's earnings are expected to grow at just 8.5% for the next five years. Hence, investors looking to benefit from LED growth should consider Cree rather than General Electric for their portfolio.

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.

Source: Here's Why Cree Is A Better Buy Than General Electric