I was quite excited to see Color Kinetics (CLRK) receive the acquisition bid from Philips (NYSE:PHG) after having taken a nice ride on the stock over the past year (and after having written about its promising future). This, however, begs the question: Now what?
Stepping back and looking at the big picture, the acquisition validates not only that LEDs will become a bigger part of the future of illumination but also that lighting will be changing. While LEDs are certainly one way we can improve energy conservation as the technology continues to improve, compact fluorescent light bulbs (CFLs) remain a superior alternative to the energy hogging incandescent. So, who is positioned for a transformation of the lighting industry? I believe that the lighting fixture manufacturers that are currently benefiting from strong commercial demand will enjoy an extended run as new lighting technologies require a very large replacement cycle for lighting fixtures as the properties of these new technologies differ significantly from incandescent bulbs.
The big players include Genlyte (GLYT) (78.54, $2.2 billion), Acuity Brands (NYSE:AYI) (60.28, $2.6 billion) and the more diversified Cooper Industries (CBE) (57.09, $10.5 billion). GLYT is the only pure-play among the three, has a slightly more attractive valuation and a better balance sheet. So, while AYI and CBE may also benefit, I am focusing my attention on GLYT.
GLYT has a rich history, having spun out of Bairnco in 1988. Since 1993, the stock has steadily climbed from about $1 per share to a recent all-time high of 88 before retreating a bit. It’s no wonder, as the company had delivered 25% EPS growth on top of 13% revenue growth for the past decade, though EPS growth has accelerated over the past few years. The company has been run by Larry Powers, CEO and Chairman of the Board, since 1994. I had to do a double-take when I read yesterday that Ernst and Young had awarded him regional “Entrepreneur of the Year” in the manufacturing sector. When one looks at how this company operates, though, it becomes clear that despite participating in what might be considered a stodgy and perhaps boring industry, this truly is a dynamic company. Some of the things that stand out to me are its decentralized approach to running its portfolio of 45 brands, its strong commitment to the education of its employees, the way it sticks to its core focus, and its enlightened views of the importance of customer responsiveness and manufacturing excellence. The growth strategy is dependent upon internal growth and acquisitions. I have to admit to not having been too familiar with the company until I saw that their Lightolier division snagged a big award at the recent Light Fair convention. Here are some key attributes:
Outlook for the stock
I think that the stock has been under a bit of pressure due to concerns regarding its exposure to a slowing domestic economy, as it is focused almost exclusively on North America. In particular, there is some exposure to the residential segment (just 12% of sales and 16% of profits). Additionally, the company has been in a position of needing to raise prices to offset the rising costs of its manufacturing inputs. So, while the estimates have continued to increase, investors have certainly discounted their likelihood of being achieved, as the company’s multiple has come down from 20X 14 months ago to its current 14.6X. If my thesis is correct that the underlying demand for lighting fixtures will remain strong, I believe that the company could see its PE expand over the balance the year. Applying a 16 multiple to the 2008 estimate of 5.64 would lead to a year-end price of about 90. The stock has good support based upon volume and long-term moving averages in the 77-78 area, with even clearer chart-based support at 75.
So, this follow-up recommendation to capture the changing illumination industry is certainly not as sexy as CLRK, but, in GLYT, one has a leading niche player in an industry with some perhaps underappreciated long-term drivers that is well managed with an excellent balance sheet and history of success. Count me in!
Disclosure: Long GLYT