Sustainable Products Mean Unsustainable Profits

by: Danny Furman

You can't have your cake and eat it too.

In business, the confectionery cliche frequently refers to an inability to simultaneously serve the best interests of consumers and shareholders. Shareholders seek to maximize returns, an inherently predatory position in relation to consumers of products or services offered. Consumers demand value and shop around for the best quality and price possible.

The most sustainable businesses price and market products in a predatory manner, while best utilizing available resources to offer consumers value. Recurring maintenance or frequent replacement are integral too.

High prices cripple consumer budgets and low quality cripples a business' image and consumer demand. Similarly, offering too much value in terms of low prices or high quality can harm a business. Sustainable companies therefore must find a delicate balance to sustain demand.

Computers last a few years, cars a few more with endless maintenance. Innovative leader in LED lighting, Cree Inc. (NASDAQ:CREE), applies bright and efficient technology to make better lighting systems. Low maintenance, long lasting products aren't exactly commonplace and consumers have every reason to embrace them. In 2009 I considered buying CREE shares, however today I have no interest, despite an apparent discount. Investors must understand that "the LED lighting revolution" all but opposes recurring profits.

The entire solar industry is confronted with a similar dilemma. Benefits for consumers and economies will far outlast periods of growth for investors.

With the global economy on shaky ground and demand from many areas already satisfied, growth appears to be fading quickly for CREE. Recent guidance has disappointed. The stock has lost more than 50% over the last 7 months and no longer garners a traditional growth stock valuation premium. China's leading solar panel producers, including Yingli Green Energy (NYSE:YGE), Trina Solar (NYSE:TSL), Suntech Power (NYSE:STP) and LDK Solar (NYSE:LDK), all trade at the bottom of multi-year ranges and sport trailing P/Es between 2 and 7. Similar cases of temporary infrastructure innovation leading to irrational investor exuberance occurred with wireless internet technology companies Dragonwave Inc. (NASDAQ:DRWI) and Telestone Technology (NASDAQ:TSTC), both peaking in early 2010.

Businesses and consumers have "gone green" far and wide. More efficient energy, information and lighting systems are in place and, while improvements figure to be around the corner, the paradigm has changed. CREE is cheaper than it has been in two years, but continues to trade at a significant premium relative to peers. First Solar (NASDAQ:FSLR) also sports a trailing P/E near 20, while smaller peers are valued in the low-single-digits.

MEMC Electronic Materials (WFR) manufactures a variety of silicon wafer products and trades over 40x trailing earnings, despite negative ROE. CREE, FSLR and WFR are leading short sale candidates until valuations fall in line with respective sectors.

DRWI has failed to profit in recent quarters and reported a record loss in Q1 FY2012. The company's VP of Worldwide Sales since 2003 resigned the day before the July 6 report. After netting $28M in 2010, DRWI is poised to lose a greater amount in 2012. The wireless network solutions provider appears to have run its brief course and is en route to bankruptcy.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

About this article:

Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500.
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here