Cree Sees China, Low-Cost LEDs Lighting Up Business

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A nation of 1.3 billion people needs a lot of light bulbs -- and a lot of energy to power them.

That's why officials in China have developed a plan to increase the use of light-emitting diode (LED) technology to help light its buildings, factories and homes.

LEDs require much less power than traditional lighting sources. Officials in China hope that by expanding use of the technology, the country will cut energy costs and reduce greenhouse gas emissions.

China aims for LEDs to achieve 30% market share of its general lighting market by 2015, according to a recent report from stock researcher Trefis.

Analysts expect the Chinese market for LEDs to grow by roughly half over the next few years.

One company that looks to hop on that gravy train isCree ( CREE ), which makes LED lighting, components and semiconductor products for power and radio-frequency ( RF ) applications.

Analysts estimate Cree has an 8% share of the global LED market. The majority of its revenue comes from selling LED chips and components to other LED bulb and lighting makers.

Cree In China

China already accounts for a pretty big chunk of Cree's sales -- 32% as of fiscal 2012, which ended in June. The company looks to increase that percentage in coming years as it widens its manufacturing operation there.

"Cree remains focused on expanding its presence in the Chinese market in the future," Trefis said.

The company also looks to drum up more business in other growing markets, including North America and Europe.

Thanks in part to mandated lighting efficiency measures in the U.S., the North American LED lamp market is expected to grow from $3.6 billion in 2010 to more than $11 billion in 2015.

Trefis estimates that the European LED market will boast a compound annual growth rate of 41% from 2010 to 2015.

Meanwhile, the global LED market has nearly tripled in size over the last five years, from $5 billion in 2006 to around $14 billion in 2012.

The main challenge to growth is convincing consumers and business customers to fork over the money for LED products. LEDs have higher upfront costs than other lighting sources, which means LED manufacturers and retailers must charge more for them than traditional light bulbs.

Cree is working to change that by developing products at more affordable prices.

"The company remains committed to driving LED adoption by optimizing performance and reducing the gap between LED lighting and conventional technology," Trefis noted.

On March 5, Cree launched a line of low-cost LED bulbs to be sold atHome Depot ( HD ). One retails for less than $10 vs. the $20 price tag that some of the less expensive models sell for.

Retail prices for the new bulbs will be $9.97 for the warm white 40-watt replacement, $12.97 for the 60-watt warm white replacement and $13.97 for the 60-watt day light.

Cree officials have not been shy about lauding the new bulbs. On its website, the company referred to the products as "game-changing" and "the biggest thing since the light bulb."

"Over the last couple of years, we recognized that the consumer is instrumental in the adoption of LED lighting, but we needed to give them a reason to switch," Chief Executive Chuck Swoboda said. "We believe this breakthrough LED bulb will, for the first time, give consumers a reason to upgrade (from) the billions of energy-wasting light bulbs."

The new LED bulbs can be placed in most home lighting fixtures. They are designed to last 25,000 hours, or roughly 25 times longer than typical incandescent light bulbs.

The news was met enthusiastically on Wall Street. Cree's stock price rose 14% to 51.16 when the announcement was made. Shares continued to rise over the next few weeks, setting a two-year high of 58 on Tuesday. The stock fell back some the next day and currently trades near 56.

A month after Cree announced its cheaper line of LED bulbs, German lighting manufacturer Osram said it will launch a new 40 watt-equivalent LED light bulb that costs less than 10 euros, or $13.10 in U.S. currency.

The move is designed to help Osram compete with Cree and other rivals such as Samsung Electronics.

60-Watt Equivalent

In a note following the Osram announcement, JPMorgan analyst Paul Coster said Osram will also offer a 60 watt-equivalent bulb at the same price for a limited time as part of a sales promotion.

Coster called the news a "positive" for Cree.

"Cree has already launched a 60 watt-equivalent at the same price as Osram's 40 watt-equivalent," he noted.

Financially, the company has run off three straight quarters of earnings growth after hitting a rough patch in 2011 and parts of 2012, when profit fell six quarters in a row.

On Tuesday, Cree posted fiscal Q3 earnings of 34 cents a share, up 70% from the prior year and in line with analyst estimates. Sales gained 23% to $348.9 million, above estimates.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: CREE , HD , RF

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