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Could INTEL’s coming results be just enough to set the LED sector free to rally?

|Includes:AIXG, CREE, Intel Corporation (INTC), RBCN, SMH, SOXX, VECO, XSD
For anyone looking at Sustainable Investing, the LED lighting sector should represent an area of key interest – and the heavy sell-off in the sector since the summer is now providing a very attractive risk-reward opportunity in this area of green technology. Of the key players in this sector, CREE is now down 34% from its highs earlier this year – with Rubicon down 41%. Despite this, the fundamentals facing both companies remain robust – and both now represent excellent risk-reward.
It’s seems that the difficulty in the LED sector has largely been driven by guilt by association with the general malaise in the Semiconductor sector, laptops etc and excess supply in the LED TV backlighting market. The connection here was more than a little bit tangential, particularly for CREE with its focus on LED lighting rather than other LED products, but it has nevertheless been dominant in the market’s eye.
The point, however, is not whether or not these concerns and the resultant re-pricing were justified, but rather whether or not the bad news has now largely been priced into the semi-conductor sector etc. Indeed, stocks such as Intel and broad semiconductor ETFs managed to bottom during September. The suggestion could be that without new, negative worries for semis and the PC market these concerns could be removed as a weight on the LED sector, allowing them to rally back on their own solid fundamentals. Indeed, if Intel’s guidance just manages to be in line tomorrow LED stocks may well start to find their own feet. In which case, the opportunity is before us now.
The arguments for CREE and Rubicon are solidly based on the growth outlook for their markets.
Energy efficient LED lighting is a solid opportunity for Sustainable Investing. CREE does produce LEDs for other uses – but lighting is its dominant and core market. The benefits for energy efficiency and CO2 emissions are clear – with savings averaging somewhere around at least 68% when replacing old incandescent light bulbs for LED lighting – and as high as 85% for the best CREE product.
Moreover, consumer adoption looks ready to steadily increase –
  • The regulatory framework in the US means that incandescent bulbs will be banned in phases, starting with the 100w bulb in 2012 and ending with the last 40w bulb in 2014.
  • According to the National Assoc of Realtors there are 131m housing units in America. The average US home has 52 light sockets. The room for growth here as consumers adopt energy efficient lighting is self-evident. Meanwhile, the corporate market may actually develop ahead of the consumer.
  • Compact fluorescent (CFL) bulbs are an alternative but these contain toxic mercury and the newer LED bulbs are more efficient.
  • LED lighting represents an up-front investment, with savings accruing later. However, prices have been dropping. And for fully dimmable, recessed lighting LED is the clear winner.
  • There are other players in the LED lighting market. However, CREE is the clear quality leader. Moreover, they have significant property rights in this arena. GE has a new LED bulb coming – but it will be produced with CREE LEDs and technology. It is therefore merely another strong source of demand for CREE.
Perhaps the most pivotal point in the growth of an industry or business is when a previously bespoke or niche product makes its way into the mainstream market. CREE has been the leader in LED lighting at least since 2003. Their sales have largely been to corporations looking to cut energy bills. Up until a year ago LED bulbs seldom cost less than $100 a pop.
However, in years to come we will perhaps look back on the recent push Home Depot has made into this market as a pivotal moment which finally pushed LED lighting into the consumer sector in a meaningful way. With their EcoSmart brand, Home Depot now offers recessed 65 watt equivalent LED lights produced with CREE for $49.95. And they have an EcoSmart LED bulb produced with Lighting Science for $18. These products save up to 85% on energy bills and are now on the radar screen for consumers – and they will likely now grow in popularity.
This will no doubt only be helped as States hopefully follow Vermont’s initiative in offering significant rebates via Utilities on the introduction of LED bulbs and fixtures via their Efficiency Vermont program.
Rubicon is a leader in making the Sapphire Wafers that go into LED production. They have clearly suffered on worries over the LCD backlighting business etc. However, they will be a main beneficiary of the coming move to LED lighting. Moreover, in recent investor calls they have announced a strong order backlog, continued pricing increases for their products and the resultant addition of new capacity. No retrenchment here.
Both Cree and Rubicon look as though they could make a sharp recovery in the near future. CREE looks like good risk-reward in the low $50s with a medium-term target of $85 – and a potential for $115 next year. Similarly Rubicon looks attractive anywhere below $20 with a $30-35 target.  

Disclosure: Long CREE and RBCN