This Stock Might Light up Your Portfolio in the Long-Term
Harsh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As a blogger whose primary interest is in technology stocks, I have made a few CAPS picks on stocks that are not quite well-known, but have the potential to do great in the long-term as they possess cutting-edge technology which can help them to greater heights. Sticking to this philosophy, I had initiated an outperform call on light-emitting diode maker Cree (NASDAQ: CREE) in January this year.
At that time, Cree was coming off a lowly second quarter and its stock price was hammered. The story continued into the third quarter and Cree took another hit. However, the stock’s overall performance hasn’t been too bad, and my pick has gained almost 17% since I made that outperform call.
A positive surprise!
Coming into the final quarter of fiscal 2012, I was waiting to see if another bad performance and a glum outlook would see Cree fall further. Thankfully, Cree managed to buck that trend this time as its revenue came in line with estimates and adjusted EPS was ahead of expectations. But, the trend of muted outlooks continued and the company once again guided below consensus estimates.
However, the market didn’t react negatively this time, as the stock inched upwards after releasing results. Maybe, the market took note of Cree’s innovation and the fact that it is among the leading players in a rapidly growing LED lighting industry. But, before we get to the company’s prospects, let’s spend a minute on its performance in the recently-reported quarter.
Despite operating in a difficult environment for LED players, Cree saw its top line jump 26% from last year to $307 million in the quarter. However, rising costs took a toll on Cree’s margins and the effect went all the way down to the bottom line, as adjusted earnings declined to 25 cents in the quarter from 28 cents last year.
However, since Cree is playing in a rapidly growing industry, I would rather focus more on top line growth since fast growing companies would spend more on research, development, marketing and other such costs. The company’s lighting products drove sales higher and grew 16% sequentially. This shows that consumers are gradually moving towards LED lighting and also, Cree’s innovative products are finding acceptance.
The company is focused on achieving its goals of driving LED adoption through innovative products. However, a sluggish macroeconomic environment is playing spoilsport. This is one of the reasons why the company has been guiding below consensus for the past few quarters. Despite the economic scenario, Cree has been delivering fantastic top line growth. Cree’s efficient products look to provide customers with more lumens per dollar, making them cost effective.
Being a leader in the industry, Cree’s products are finding acceptance across customers. For example, Cree facilitated the largest municipal street lighting project in China, installing 20,000 street lights which had 1.9 million of Cree’s LEDs. Cree’s continuously evolving technology and products such as XLamp, CR Series and CS Series LEDs keep raising the benchmark in the industry.
Huge opportunity ahead…
Cree’s innovation will surely stand it in good stead, enabling it to spearhead the LED lighting revolution. Although the present economic quagmire might be a headwind, but it shouldn’t be forgotten that LED lighting is the technology of the future which all of us will be gradually using. Light bulbs, which aren’t eco-friendly due to CO2 emissions, are being gradually phased out.
Moreover, prices of LED products are falling. On one hand, this is certainly a problem for Cree as its margins have been shrinking. However, it is a tailwind as well since the low prices will thrust LED adoption higher. Moreover, Cree is looking to escape the bane of falling prices through its innovation and would probably get better as the industry matures.
…but bigger players to contend with
Although Cree is leading the space, and its lights have been getting decent reviews from customers, the competition is also quite intense in this space. General Electric’s (NYSE: GE) lighting unit and Philips Electronics (NYSE: PHG) are the bigger and more established players with whom Cree will need to fight it out. Sales of Philips’ energy-saving light bulbs helped the company trounce Street expectations in its last quarter, a sign that they are also finding traction with customers.
And as far as GE is concerned, we all know that the company has been a giant in lighting solutions over the years and would do its best to spearhead the LED market. For this purpose, GE has also built an impressive array of energy-efficient bulbs such as the GE energy smart.
The bottom line
After delivering a much needed positive surprise, it might seem that Cree is good to launch itself higher straightaway. But it won’t be entirely right if we think that way. The industry is still pressured due to falling prices and economic uncertainty. However, Cree might make for a good long-term investment. It’s a part of the future, a part of the still nascent LED lighting industry and has the required innovation and R&D skills which have enabled the company to execute a big project like the one in China.
Its focus on developing more efficient products will probably enable Cree to stabilize its margins and win more customers. Hence, if you are ready for the long haul, you can certainly take a look at Cree for your portfolio.
TechJunk13 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.