Cree Inc.: A Shining Example of LED Industry Efficiency

I believe that LED’s are going to transform the lighting industry and that the ‘lighting revolution’ will occur faster and with greater demand than expected. I have chosen to write about Cree Inc. (CREE) because it has the industry lead in efficiency which is one of the driving factors in this revolution. Cree has achieved more than 100 Lumens per watt which allows LED’s to economically replace traditional lighting as for example the traditional 60 watt bulb. Cree has a plant in China called COTCO that produces “Xlamps.” Cree is one of the market leaders in the production of LED lighting, and competes with other companies such as Nichia, Osram, and Philips (PHG). Nichia and Osram are not traded on the US exchanges.

Lets begin with some of the advantages of LED lighting. The efficiency of LED’s exceeds that of other forms of lighting. This can save businesses, municipalities, and homes money as it reduces energy consumption. Estimated payback time is about 3 years, and this does not include some of the other benefits LED’s bring such as the cost of disposing of fluorescent lights with mercury. LED’s can be used to replace most if not all forms of non LED lighting products. These statements are measured against existing technology that is now in the process of bringing products to the market. Other advantages include a much better quality of light, no flicker on startup (flicker is immensely annoying if you think about it), varied lighting as in infinite color variations, dimming, and LED’s last longer. The advantages of LED lighting will accelerate the ‘Lighting Revolution’ more rapidly than expected. The pace of the revolution will be limited only by the ability of companies to vertically integrate and execute. Margins, at first, will be high and the only limitation on revenues will be the ability to supply demand.

Cree estimates their market ‘opportunity’ as increasing from roughly 400 million to 3.5 billion in the next four years. I do not consider this an overestimation, it will not be a question of the ‘opportunity’, but the ability of Cree to vertically align and execute. Again, CREE is the leader in lumens per watt which is a measure of efficiency and is related to energy savings. This is Cree’s market advantage and a good one to have in a market place that will be like an infinite opportunity.

Before I write an article that is too one sided let me express some concerns about Cree. As an investor I am most concerned about their ability to vertically align, execute, and compete with some larger companies. Cree makes the LED lights, but these need to be integrated in a fixture and made available to consumers. They might have the advantage in efficiency for a while, but other companies like Nichia and Philips are not far behind. The other companies may show more success at creating an actual product and putting it in front of the consumer. This is an area where Cree seems to have some unsettling weaknesses.

Now that I have discussed concerns let me mention some recent successes that Cree has had in marketing. LED lighting from Cree is being used by the city of Ann Arbor, and the Olympic swimming venue. Cree has formed a collaboration with Duke Energy (DUK) (no small utility), which may lead to customer incentives to purchase LED lights. Cree has a production facility in China called COTCO. COTCO will increase manufacturing capacity and help Cree enter what will be a huge Chinese market. They also have a ‘solutions provider’ network of companies that can vend the final product. However, I did not notice any of the major lighting companies on that list.

Finally, I have to mention the ever present takeover speculation. I think this is unfortunate as it creates a rocky ride for shareholders as people enter on rumors and then the shorts depress prices (maybe its naked shorting by institutional investors that are given special privilege by corrupt authorities to short virtual shares that ordinary investors don’t have.) Anyway this can then lead to sharp rallies as they cover on yet more rumors. Personally I would prefer to see the company grow, on its’ own, and not be taken over. I think this ultimately would offer shareholders the best reward, a reward better than say a 40% increase in price as a result of a takeover. I wish the people buying on rumors and the shorts both would stay away. I would like to sit back and just watch a smooth exponential go up.

Disclosure: I am long CREE.

Comments

[Young]

Please submit your opinion regarding the position of this company in the market,, would appreciated.

[bert]

Position relative to other companies is that they have opportunity to continue forward with substantial market share. Position on price: if they don't get 'knees' in the form of positive news price will fall especially if we slide into recession, however, when we do get 'knees' in the form of positive news price will rise quickly. Hope that addresses your question.

[JeffShattuck]

Nice article. You talk about efficiency, though, without mentioning cost. As I understand it, LEDs are still way to too pricey. Can you comment?

[bert]

It was difficult to find cost exactly because basically Cree Inc. won't say if you call, but if you look online it is possible to find the cost depending on the LED. I found some for around $1.75. Cree claims it takes 3 years for say a parking garage to break even not including extra replacement and disposal fees for the traditional lighting. Did not mention it in the article but Cree would for sure be a 'Green' company. These have been getting a lot of attention recently, and hopefully more municipalities will start adopting LED lighting. Thats the best I can do sorry not more specific.

[bert]

Cree Inc. will present 12/7 at the Lehman Brothers Global Technology Conference see the website cree.com to register. Maybe could give price a boost but they need some good news.

[bert]

"Piper Jaffray Upgrades Cree (CREE) to Buy

Piper Jaffray upgrades Cree, Inc. (Nasdaq: CREE) from Neutral to Buy and raises its price target from $25 to $30.

The firm said Cree will see several catalysts that will drive earnings growth in 2008:
First, Piper Jaffray said it expects demand to improve for high-brightness LED products in conjunction with backlighting of notebook computers. The firm said LED backlighting with Cree's high-brightness LED's could hit the mass market by 2009.

Next, the firm also said the Olympics in Beijing will likely drive growth as the Chinese government will attempt to "promote its environmental credentials..."&q...

[bert]

Ok guess I have my own CREE Blog here let me know if your reading. Congress may pass legislation to outlaw incandescents in new energy legislation before the senate. This could be really big news for companies like CREE. Still some concerns about just what is the company doing to get its products in front of the consumer and no news on that recently.

[bert]

Well, it happened incandescents are now illegal! (effective 2012). But apparently they plan to allow compact fluorescents. If we can just get a ban on everything except XLamps we will be in luck! CREE up in price .47 as I write this. Cree is trying to climb back in its narrowing downward wedge formation that goes back about two months.

[bert]

Cree up 2.79% on the day is just getting to the top of its narrow two month gradually descending downward wedge like formation. Watch this wedge for a break out. I project that CREE starts getting more attention in the news. A wedge breakout after this period of consolidation on some kind of news could be powerful and sustained. There was an article in Barron's to the same effect.

[bert]

Two more positive mentions one on CNBC and another from IBD. Add to that the previous upgrade and we are almost on a roll here but we haven't had any good news from the company recently. We need a new city or a highway. As always I am concerned about that market presence issue. As far as the compact fluorescents mandated by congress to replace incandescents turns out they contain mercury!! So won't be too long until they figure out it needs to be LED's and not compact fluorescents which by the way are almost as efficient as the current LEDs.

[bert]

Cree up a quick 4.6% on that wedge breakout I had mentioned. Lets see if it holds. Couldn't find any news.

[bert]

Guess I might have not realized how fast and how far this breakout would go up 13.64%. Hope someone has been reading here. Turns out CNBC had a article on CREE and the solars and they are all flying high.

[bert]

Finished the day up about 8% with CREE holding most of its gains. CREE is volatile but when we get some good news out of the company along with another endorsement like the one today on CNBC thats when it will really fly.

[bert]

Well CREE has had some mighty gains recently. Now the street (Cramer) is trying to depress prices again. Maybe they got stuck short since their last attack. This time they cited the cell phone market and increasing competition in their article. Their analysis seemed poor as cell phones are just a small portion of CREE's business. As far as competition they cited several companies including AU (who doesn't have a chip factory yet) that could be a factor but at this point the market is wide open and CREE still has the lead in lighting class LED technology. But I say just start a portfolio of LED companies. On that subject I have been looking at another company up 8% since I went long LSGP.OB and more than 100% recently (wish I had found it just a bit sooner!) This is a penny stock but has good management is doing exciting projects like the new years globe at times square and really this looks like a good company poised exactly at the center of this lighting revolution opportunity.

[bert]

On the cost front I have been doing my research. LSGP offers a zero price installation contract for things like parking garages. The contract allows purchasers to pay back over time instead of paying a higher electric bill. If you want to install LED's in your house they have products available with prices:
store.lsgc.com/
company site:
www.ledholdings.com/
The lights seem still a bit pricey for say Wall Mart around 20 - 70. But I say this is getting really close as new homes (I don't think any new homes built recently) but anyway most likely anything new will just start with LED's since thats the most economical starting point.

[bert]

Correction AUO not AU. Another company of interest AIXG makes semiconductor manufacturing equipment and other cool stuff like nanotechnology.