Various research companies and analysts anticipate the LED lighting market to grow 45% per year through 2019. The market sizeof LED lighting was $4.8 billion in 2012, and is anticipated to reach $42 billion by 2019. This market is projected to grow annually at a CAGR (compound annual growth rate) of 12% from 2012 to 2017. The LED lighting market growth is mainly due to reducing prices, higher luminous and increased interest by the channels in pushing LEDs to consumers, this is providing deeper penetration. Cree (CREE, Financial), is one of the leading player in the LED lighting and fixture market maintaining a rich product portfolio with innovative LED lighting solutions. I have tried to explain the reasons for the anticipated growth of CREE, in the rest of the article.
Strong Quarter
The company recently released its fourth quarter report for the fiscal 2014. Consolidated revenue was up 16%, to $436 million as compared to revenue of $375 million reported for same quarter last year. On a sequential quarter comparison, it also recorded gain of 8%. GAAP net income was up by 6%, to record $30 million, or $0.24 per diluted share year-over-year compared to GAAP net income of $28 million, or $0.23 per diluted share, same quarter last year.
Gross margin in the quarter was 37.2% as against 37.5% in the same quarter last year. The operating margin was down mainly due to high operational expenditure which was $130,545 as against $109,864 year over year. The company’s innovation continues to grow; this is exemplified by its R&D expense which was higher as compared to same quarter last year. Higher operation expenditure was mainly due to increased R&D expenditure and cost incurred with the sales and marketing.
Strong product portfolio
Cree has always been innovative and constantly coming up with new products as a persistent measure to acquire wider market share. Just a week ago, it launched MR16 series LED lamps with TrueWhite® Technology. This product is complete replacement for billions of existing Halogen lamps and the company is confident about its success in the LED lighting market. This new product is cost effect with a short payback term (less than a year) can be another feather in the cap for CREE. It is expected to be priced at around $25 and consume 83% less energy to meet the requirement of the ENERGY STAR® certification. This certification helps Cree to provide LED lights with rebates as announced by the U.S government under this certification program.
Synergies that can further provide growth
CREE now plans to have a stake of 13% in Lextar Electronics as against investment of $83 million in Lextar electronics and will acquire around 83 million shares of Lextar Electronics. As a part of this strategic move, Cree and Lextar are into an agreement whereby Cree will make an investment in Lextar and the companies will enter into a supply agreement for sapphire-based LED chips. Sapphire substrates are ideal for use in LED and non-LED applications for various advantages like high temperature resistance, high strength, good electrical insulation, and low dielectric loss. Sapphire substrate in LED lighting helps prevent stray currents caused by radiation from spreading to nearby circuit elements. Looking at some of these benefits and ever growing LED market, this synergy will again benefit CREE in longer run with competitive advantages over its rivals.
Guidance
The company seems to be quite optimistic about its growth, and this is illustrated by its anticipated guidance for the next quarter of the new fiscal 2015. For its first quarter of fiscal, Cree anticipates revenue to be in the range of $440 million to $465 million. GAAP net income is expected to be in the range of $30 million to $37 million, or $0.25 to $0.30 per diluted share.
Conclusion
Currently the stocks of CREE are trading around the lower side of the 52 weeks high-low range. Financially, it has been recording quarterly year over year and sequential quarter growth, and constantly releasing innovative LED lamps to attain wider global footprints.The LED lighting market is anticipated to reach $42 billion by 2019 and I have no reason to quote, why CREE won’t benefit from this fast growing market. The company maintains a strong balance sheet with no debt and cash balance of $1.16 billion. This can be the right time for an investor to consider CREE in their portfolio.
