Billy Beane Wouldn’t Have Bought This Stock, but You Should

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“Billy, you got a kid in there that's got a degree in Economics from Yale. You got a scout here with twenty nine years of baseball experience. You're listening to the wrong one. Now there are intangibles that only baseball people understand.”

This is what Grady Fuson, the scouting director of the Oakland Athletics, said to Billy Beane against the sabermetric approach he was following to rebuild the team in the movie Moneyball. Of course, Billy’s method proved successful, but what Grady said in the lines above certainly stands true, as talent can’t always be judged in terms of statistics.

Billy ain’t always right

When players are young, and they possess talent and show potential, statistics go out of the window. Similarly, when a company is plying its trade in a nascent and fast-growing industry, one should swat statistics such as an expensive trailing P/E multiple aside. This is what I had said about light-emitting diode (LED) maker Cree (NASDAQ: CREE) last month.

While analysts were saying that the stock is priced for perfection and is expensive, the company would have to endure more competition and there isn’t much upside left, they were leaving out the intangibles. They were discounting the fact that Cree is a pure-play LED company and it specializes in LEDs unlike other conglomerates, it has cutting-edge technology at its disposal, and has seen its order backlog swell.

Above all, the company is a part of the fast-growing LED lighting industry, which is expected to double in revenue by 2015 according to IMS Research. Cree is riding the LED revolution with all its might and isn’t showing any signs of slowing down, as seen in its just-reported second-quarter.

On a lightning run

Cree reported revenue of $346.3 million in the quarter, 14% higher than last year and ahead of the Street’s $331 million expectation. Also, non-GAAP earnings of $36.9 million, or $0.32 per share, were better than last year’s earnings of $28.7 million, or $0.25 per share, and also ahead of the $0.29 consensus estimate.

Strong sales of LEDs and lighting products drove Cree’s revenue higher. In addition, the company’s fully integrated vertical lighting model enabled it to produce cutting-edge products at low costs, and this translated into a non-GAAP gross margin improvement of 390 basis points over last year. Cree’s business was pressured by falling prices of LED products last year, but the problem is under control now and the company’s active inventory management has helped further.

The positives don’t end here, however. Cree’s revenue and earnings guidance comfortably exceeded consensus estimates, sending its shares up almost 15% in late trading. The company expects revenue between $325 million to $345 million and earnings of $0.30 to $0.35, well ahead of analyst estimates of $323 million and $0.28, respectively. A sunny guidance tells us that the industry isn’t losing steam and Cree is doing pretty well to ride its growth.

Cree expects such good numbers despite expecting a slowdown due to the Chinese New Year holiday and low sales of outdoor lighting products in cold areas in the third-quarter. This has led to a slightly lower order backlog than last year due to seasonality. However, Cree is quite confident of its prospects through 2013 and expects adoption of LED products to improve as the year progresses.

Competition and innovation

It seems Cree’s curse is now a blessing, as low prices of LED products have spurred their adoption. Moreover, considering the eco-friendly nature of LEDs, it isn’t surprising that they are gradually being adopted at a faster pace. Cree is going all out to tap this growth despite the presence of heavyweights such as General Electric (NYSE: GE) and Philips Electronics (NYSE: PHG).

General Electric has been making huge strides in LEDs, and has been raising the bar. For instance, the company’s easy to use and reliable channel letter lighting systems are in great demand, and its wheels of innovation aren’t going to stand still. Similarly, Philips has also been taking innovation to new levels. It has tied up with Apple for selling Philips Hue, which is an iDevice controlled LED bulb and can tune light settings just the way one wants.

But Cree’s vertical integration and innovation are weapons that have helped it stand its ground in the wake of such competition. It manufactures both LED modules and lighting systems, and this should result in better synergy. Moreover, the company is always focused on improving the efficiency of its products by trying to deliver more lumens per dollar.

Its industry leading products, such as the cost-efficient XLamp series and replacement lamps for phasing out “obsolete energy-wasting” halogen lamps, have improved Cree’s position in the industry. Its products command presence across a number of applications, such as street lighting projects, restaurant lighting etc., among others.  

Final words

Just as we need to go beyond the sabermetric approach to scout for talent, we also need to look beyond the valuation-based approach of investing sometimes. A high rate of P/E isn’t necessarily a bad thing, since Cree is involved in an industry which is expected to grow at a fast clip. To tap the LED opportunity, the company is focusing on innovation and it has paid off so far. Going forward, one can expect the company to benefit further from LED adoption and continue its solid run in 2013. 


TechJunk13 has no position in any stocks mentioned. The Motley Fool owns shares of General Electric Company. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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