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Friday, November 21, 2008

What's up with the lowly LED?

Pretty much every sector of the market is ugly these days so I console myself by looking forward to better times and trying to determine what sectors will be ready to outperform when the economy begins to gain traction again.

Could light emitting diodes be one of those sectors?

The simple light emitting diode (LED) has been around for decades and perennially shows up in signs and signals and as indicators in numerous gadgets. This mature sector of the semiconductor industry, however, is about to get juiced up.

In December of 2007, President Bush signed into law the Energy Independence and Security Act of 2007. Among many other things, the law mandates the phase-out of inefficient, power-hungry incandescent bulbs in favor of more efficient lighting solutions such a compact fluorescent and LEDs. Specifically, the law requires roughly 25 percent greater efficiency for light bulbs, phased in from 2012 through 2014. This effectively bans the sale of most current incandescent light bulbs.

Consequently, the rush is on to develop solid state lighting solutions that provide the large amounts of light (measured in lumens, a familiar term if you read the packaging of light bulbs) that incandescent bulbs do while keeping cost and power consumption down.

Currently, as consumers we commonly see flashlights with LEDs and under-counter lighting solutions but companies are ramping up their efforts so that LED lighting will be available for all kinds of common uses. LEDs have a natural advantage in that they are rugged and energy efficient and can have lifetimes measured in decades. The challenge has been to obtain white light at high enough levels of luminosity to make LEDs a viable alternative to incandescent bulbs.

The companies that get there first will, in the near term, take advantage of the green movement and then eventually benefit from the phasing out of incandescent lighting. Some analysts expect LED lighting to claim 70% of the lighting market over the next 20 years.

For investors, there is one company that is a pure play on the fate of the LED: Cree, Inc. (CREE)

The company is active in nearly all segments of the LED sector. Cree supplies devices that are used in backlighting for mobile products, automotive interior lighting, full-color electronic displays, gaming equipment, consumer products, electronic equipment, general illumination, portable, architectural, signal, and transportation lighting, signage, etc. In addition, the company also manufactures RF components for various wireless applications including WiMAX.

Just this week Cree announced it had achieved industry-leading performance of 161 lumens per watt for a white power LED. The component is still in the R&D phase but shows the company is making strides beyond its already commercially available 100+ watt per lumen XLamp series of LEDs. These products can provide the lumen output of a streetlight in a 75% smaller package. The company claims they are already shipping millions of units.

Unfortunately, the financials for Cree are not especially enticing at the moment. Earnings over the last four quarters have not been growing. Some of the financial ratios are not particularly attractive with a PEG of 1.9, price-to-sales at 2.5 and a trailing PE of almost 48. Still, it's a billion dollar company that is cash flow positive and in this market it is getting cheaper by the day.

Conclusion --

The old light bulb as we know it is on the way out and LEDs are coming into their own. It would seem there should be an opportunity to profit as we watch this changing of the guard.

Cree has an opportunity to be a significant player when the move to LED lighting solutions gathers momentum. Until the time when the company begins to benefit from its first-mover advantage, however, it seems like Cree will remain merely a good candidate for your watch list. It won't hurt to keep an eye on them over the course of the next year or two.

Disclosure: none


Speedmaster said...

LEDs have been 18 months away for the last 4 years. ;-)

Seriously though, they have come a long way and I think a few high-end cars use them for exterior lighting.

TradeRadarOperator said...

Speedmaster - I know what you mean: there are always a few technologies that seem to ready to break out but they never quite make it.

Compact florescent lighting seems to have quite a lead over LEDs at the moment but I think LEDs will finally begin to be at least a viable alternative in the next couple of years. Advances in heat dissipation techniques could do the trick.

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