Cree, Inc. (NASDAQ:CREE) develops and manufactures semiconductor materials and devices focused on light emitting diodes [LEDs]. Cree has a market cap of about $1.6 billion, $265 million in cash, and no significant long term debt. The trailing P/E is about 22 and about 12% of the outstanding shares are held short.
It appears that the incandescent light bulb is on its way out. Although incandescent light bulbs are inexpensive, they use energy in a non-efficient manner and environmentalists think they have made a major contribution to global warming. Consequently, lawmakers in the US and abroad are talking about banning incandescent bulbs.
California and Canada are banning the use of incandescent bulbs by 2012 while Australia has announced plans to ban incandescents by 2010. Energy conservation and strategies to overcome global warming are becoming increasingly important political and social issues. Banning incandescent light bulbs is a relatively easy way to make a significant contribution to energy conservation. Therefore, the death of the incandescent bulb in the US and many developed countries is only a few years away.
Cree has the potential to be a major beneficiary of new legislation banning incandescent light bulbs. Cree’s white light LEDs have a longer life and use less energy than incandescent light bulbs. In the US lighting accounts for 22% of all electricity consumption. According to the US department of energy, widespread use of LED lighting could cut energy consumption due to lighting in half.
LEDs and compact fluorescents are the primary alternatives to the aging incandescent light bulb. Although compact fluorescents are currently less expensive than their LED counterparts, the price to produce white light LEDs is dropping rapidly. Compact fluorescents have been widely available for the last decade, but consumer adoption rates of compact fluorescents have been low. The light quality of compact fluorescents is typically poor and there is a significant delay when compact fluorescents are turned on. LEDs can provide a higher quality light, with no delay, and they should last about five times longer than compact fluorescents.
Although it will be a few years before LED prices will come down enough for the average consumer to purchase LED lighting solutions, businesses are already implementing LED lighting. Energy conservation and eco-friendly policies have become important issues for many large US businesses and LED lighting is another way for these companies to help conserve energy and show consumers that they are not heartless giants.
Financial results at Cree have been disappointing for the last few years. Although CREE has appeared poised for rapid growth for many years, results have often disappointed. In Cree’s most recent quarter, the company basically broke even, although the company officially posted earnings of $0.27 per share, the majority of these profits were due to a tax benefit. Over the past year investors have often expected faster growth and higher profits than Cree has been able to produce and shares of Cree have dropped from about $35 to $19. Although prior results have failed to live up to expectations, the growing demand for environmentally friendly LED ambient lighting solutions could transform Cree back into the growth stock it once was.
Recently, shares of Color Kinetics (CLRK) have been on a tear. It appears that the rally in Color Kinetics is directly related to increased news about incandescent bulb legislation efforts. In the last four trading days shares of Color Kinetics have jumped from about $21 to $25.50. Although Color Kinetics should also be a beneficiary to the LED trend, at this point in time we feel that Cree has a more compelling valuation. As news about legislation banning incandescent bulbs continues and big businesses start to advertise their environmentally friendly efforts to switch to LED lighting, Cree has the potential for rapid appreciation similar to that recently seen in shares of Color Kinetics.
Cree has the added bonus of a relatively high percentage of shares held short. Considering the recent strength in the overall market, these short shares could help propel CREE higher with any positive news. Last months Wall Street Mayhem pick Gmarket surged 18% after earnings despite missing estimates on the top line. We believe this move was largely due to short covering. If the trend started by Color Kinetics this week continues, both Cree and Color Kinetics could benefit from short covering as news about LED lighting continues to grab the attention of the investing public.
The recent surge by Color Kinetics could be the start of increased investor interest in all things LED. Energy conservation is a trend that is showing no signs of slowing down. Solar companies like Trina Solar (NYSE:TSL) have been flying recently and we believe companies focusing on LEDs could be the next environmentally friendly energy conservation sector to receive serious investor interest.
BUY CREE near $18.85, set stop loss at $17.50
Full Disclosure: Wall Street Mayhem is long CREE and CLRK
CREE & CLRK 1-yr. chart: