TCP International: Opportunities And Risks In This LED-Based Offering

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 |  About: TCP International (TCPI)
by: The Value Investor

Summary

TCP International operates in the rapidly growing market for LED and CFL lighting.

The company grows quickly and is profitable.

After a disappointing offering, the appeal has improved, yet key risks remain.

TCP International (NYSE:TCPI) provides energy-efficient LED and CFL technologies. The designer and manufacturer of energy-efficient lamps witnessed a very disappointing public offering this week.

After the poor pricing, shares trade at appealing multiples, if you believe in the continued growth path of the company. That being said, there are some risks related to this offering, including the limited size, competition, technological changes and heavy reliance on some retail clients.

The Public Offering

TCP International operates a portfolio of LED and CFL lamps based on high-quality and energy-efficient design. The company was founded back in 1993, and sells its lights in thousands of stores, having sold over a billion lighting products cumulatively to-date.

TCP believes the market for LED lighting solutions is at an inflection point, resulting in huge future growth opportunities. According to McKinsey, the global market for LED and CFL products is anticipated to grow from $22.1 billion in 2011 to an estimated $87.4 billion by 2020, which would result in a compounded annual growth rate of 16.5%.

TCP International sold 7.14 million shares for $11 apiece, thereby raising roughly $78.5 million in gross proceeds. All shares were offered by the company, which will see the proceeds from the sale, while no shares were being offered by selling shareholders.

Demand for the offering was very poor, with the firm and the underwriting banking syndicate aiming to sell shares at a $13-$15 price range. At $11, the company's market value is seen around $305 million.

Deutsche Bank, Piper Jaffray, Canaccord Genuity and Cowen and Company were the banks which brought the company public.

Valuation

TCP International has a strong base across the globe, where it sells products through retailers like Home Depot (NYSE:HD) and Wal-Mart (NYSE:WMT) in the US, and through Carrefour in Europe. In the C&I channel, it serves end-customers through HD Supply, Regency, Rexcel and Grainger, among others. The company is present in the e-commerce market as well, selling products on Amazon.com (NASDAQ:AMZN).

The company has a product line-up of thousands of SKUs, and its high quality as well as manufacturing standards have resulted in the Energy Star rating being awarded.

In 2013, TCP International posted revenues of $428.9 million, which was up by 19.4% compared to the year before. The company posted earnings of $8.2 million versus a loss of $6.2 million in 2012, which was driven by litigation costs at the time.

Growth continued for the first quarter, although the pace slowed down to 12.0%, with revenues coming in at $101.1 million. Earnings quadrupled, increasing from merely $0.9 million to $3.9 million.

Before the offering took place, TCP operated with $23 million in cash and equivalents. Total debt stood at nearly $147 million, on which the company paid about $6 million in interest last year. Factoring in the gross proceeds, the company will still operate with a net debt position of about $60 million. Proceeds from the offering will be used to retire debt and invest in greater manufacturing capacity.

At $11, shares are valued at little over $300 million. This values equity in the business at merely 0.7 times sales and 36 times last year's earnings.

Investment Thesis

As noted above, the public offering of TCP International has been very disappointing, to say the least. Shares were sold far below the low-end of the preliminary offering range, being offered 21.4% below the midpoint of that range. This was followed by losses of more than 5% on their opening day, as shares are approaching the $10 mark rapidly.

While the company is showing solid growth and is profitable, there are some risks. Normalized earnings for 2013 came in around $15 million, valuing the business at roughly 20 times earnings, which is fair given the solid growth. Yet, margins are slim and the company has some specific risks, including, of course, foreign exchange movements and rapid changes in technology.

Perhaps the greatest risk is the reliance upon major retailers, which is an extra risk given that the company has no long-term contracts. Home Depot makes up nearly a third of total sales in 2013, while Wal-Mart generates another 13% of sales. Notably, Home Depot's increased focus on lights from Cree (NASDAQ:CREE) might pose risks over time.

As such, there are quite some risks, notably competition, technological changes and reliance on a few retailers in this offering, possibly explaining the poor reception of this offering. Opportunistic investors might pick up some shares in this offering, as long as they are aware of the risks.

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