Zachary is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Shares of Cree (NASDAQ: CREE) are already trading 85% higher this year, but investors can still expect very attractive long-term gains from this stock based on the company's new technology and ongoing earnings growth.
It's not an overly dramatic statement to say that Cree is literally reinventing the light bulb. The company specializes in highly efficient LED lighting and has recently come up with a new bulb that is transforming the consumer lighting industry.
With cutting edge technology and a tremendous distribution partner, Cree's earnings should increase dramatically over the next several years along with the price of its stock.
Finally! A no-compromise light bulb
If you've tried to change out traditional incandescent light bulbs in your home with new low-energy replacements, you know that the aesthetics of these lights can often be very disappointing. Compact fluorescent bulbs often give out harsh white light, wile other LED lamps can give off an unpleasant blue glow.
While these bulbs may do the job of cutting down on energy costs, the low quality of lighting has made it difficult for most consumers to make the switch.
The new line of bulbs addresses many of the reservations that consumers have with new lighting technologies:
The light gives off a similar light to incandescent bulbs
The light is mercury free
The light is designed to burn for 25,000 hours (10 times a traditional bulb)
The light comes with a limited 10-year warranty
The new bulbs are reasonably priced at $12.97 for a 60 watt replacement and $9.97 for a 40 watt replacement. Of course the bulbs cost about ten times more than a traditional incandescent bulb, but the true cost of lighting for a consumer comes from the energy costs rather than the actual bulb cost.
Cree estimates that by replacing just the five most used lights with the new LED bulbs, consumers can save an average of $61 per year.
Picking just the right distribution partner
Often, technology companies are able to design strong products, but then, totally miss out on the profit potential because they fail to effectively market the product to consumers.
Cree, on the other hand, has secured a tremendous distribution partner through an exclusive agreement with The Home Depot (NYSE: HD).
The Home Depot will be a tremendous outlet for Cree to mass market its new technology. On a retail level, Home Depot operates 2,257 stores in the U.S. as well as Canada and Mexico.
Not only does it have a tremendous reach for retail customers, but it also markets products to consumers who are actively thinking about home improvement solutions. So, the choice to use Home Depot as Cree's distribution partner should be the most effective way to market the light bulbs to individuals.
On a professional level, the Home Depot has a very healthy relationship with blue chip building companies, along with a myriad of independent contractors. So, Cree's partnership with the Home Depot should also put their bulbs in the perfect spot to be introduced into new homes as well as remodeling projects.
Healthy financials and accelerating growth
Cree has a very stable financial foundation with total cash of $937 million and zero debt. This means that the company can continue to invest in research and development without capital constraints -- while simultaneously increasing profits for shareholders.
I'm particularly impressed with the way the company manages inventory. At this point, the company has only 82 days of inventory on its books. This is an important metric for an innovative company, because as new technology advances are made, old inventory can become obsolete.
Since Cree keeps inventory at a very reasonable level, it has much less risk of being forced to write down the value of its inventory -- thus leading to higher confidence for future profits.
Speaking of profits, the last two quarters have seen a sharp increase in profits while revenue levels hit new highs.
As the company begins to capture profits from its new revolutionary line of light bulbs, earnings growth is expected to accelerate.
Cree's fiscal year ends on June 30, and analysts expect the company to book $1.32 per share in profit this year. Over the following 12 months, Cree is expected to grow earnings by 40%, to an EPS level of $1.85. Analysts have been revising their estimates higher in recent days, so if the trend holds, this $1.85 estimate should wind up being conservative.
At this time next year, investors will be looking forward to the June 2015 expectations when determining what they will pay for the stock. If estimates continue to increase by 40% annually (and Cree certainly has plenty of room for this type of growth in the light bulb market), the 2015 earnings estimate should be around $2.60 per share.
Assuming a PE of 40 (which is reasonable for a high-growth company like Cree), the stock price has a very good shot at eclipsing $100 per share. That's roughly a 60% increase from the current price point -- and still a conservative estimate given Cree's earnings potential.
Isolating the LED investment Cree appears to have a leg-up on other LED lighting companies, given favorable reviews of the company's high quality warm white bulbs. But, the company does face some competition from Philips Electronics (NYSE: PHG) as well as General Electric (NYSE: GE).
Both GE and Philips have a wide portfolio of energy efficient LED bulbs along with compact fluorescent (CFD) offerings. But, from an investment standpoint, neither of these companies allow us as investors to benefit specifically from the transition to LED lighting.
Philips, as a company, focuses on three different sectors: Healthcare, lighting, and consumer lifestyle. Lighting only makes up 34% of the company's total revenue, so, even if Philips grows the lighting business substantially over the next two years, the gains will be diluted by performance in the company's healthcare and consumer lifestyle divisions.
Similarly, General Electric is a strong innovator in the LED light category, but the division only makes up a fraction of the total. the company's lighting business is a portion of the "Home & Business Solutions" segment, which made up $8 billion of the company's $147.3 billion in total revenue.
In order to profit directly from the accelerated growth in LED lighting, Cree remains the strongest choice given the quality of the company's new technology, a strong distribution partner, and most importantly, its exclusive focus on lighting.
Cree is pioneering a new product that is very likely to take over the light bulb industry as we know it. I expect that the company's ever-developing technology will continue to push the stock higher for years to come, and investors who are along for the ride should capture some tremendous returns.
Don't let this growth stock rally another 80% before adding it to your portfolio. Pick up shares of Cree today so you can participate in the growth!
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