What You're Missing About This LED Maker

Credibility on Wall Street is built from consistently meeting or exceeding guidance. When a company fails to meet those expectations in the short term, how are investors supposed to trust its guidance for the long term? Previous and current disclosures from LED maker Revolution Lighting Technologies (NASDAQ: RVLT  ) should leave you with skeptical about its outlook and valuation.

Results
On Aug. 7, Revolution Lighting Technologies reported its second-quarter results, posting revenue of $7.4 million and an adjusted net loss of $1.3 million. CEO Robert V. LaPenta told investors to "expect a continued acceleration in revenue and profitability as the year progresses." Investors were led to believe the $7.4 million in sales was a floor.

Then on Oct. 1, Revolution Lighting Technologies announced updated guidance. Not only would the third quarter fail to show acceleration, but sales would actually drop by 20% to 30%. CFO Charlie Schafer blamed this on "certain international orders coming in later than expected," and said the fourth quarter would see more than $10 million in sales. That was disappointing, but it sounded like a reasonable explanation.

Then, on Nov. 8, Revolution's third-quarter results arrived. Compared to the second quarter, revenue was down 28% to $5.3 million. Adjusted net loss rose 162% to $3.4 million. Sales guidance for the fourth quarter remained near $10 million, although the wording changed from "over" that figure to "approximately" close to it.

It also predicted revenue of $50 million for 2014, up from 2013 guidance of $35 million, and called that 50% organic growth. But isn't 50% growth on $35 million equal to $52.5 million? That miscalculation alone in the press release should raise an eyebrow.

The press release once again stated the shortfall for the quarter was just due to the delayed international orders, but it told investors that they should expect a big fourth quarter and onward. Or should they?

10-Q filing
In its 10-Q filing with the SEC, Revolution Lighting Technologies stated, "The majority of our sales are to the North American market ... we expect that region to continue to be a major source of revenue for us. However, we also derive a portion of our revenue from customers outside of the North American market."

This means that the large international orders for the fourth quarter are likely temporary, and North America so far isn't showing much in the way of growth. In order to continue the $10 million run rate from fourth quarter, and add 50% growth on top of that, sales from customers in North America will have to replace the large international orders, plus a lot more. There's no obvious evidence in the numbers or in anything else presented by management to support this.

What if management actually does meet its outlook?
Even if management achieves a true 50% growth over $35 million in sales to $52.5 million, it still has a long ways toward justifying its market cap. Revolution Lighting Technology is calling for 15% of revenue to be realized as earnings before interest, taxes, depreciation, and amortization, or EBITDA, which works out to just under $8 million. Even if you use the almost-always-larger EBITDA as earnings, it has a P/E multiple of around 33, based on a market cap of $263 million.

Now compare that 33 P/E to lighting solutions companies Acuity Brands (NYSE: AYI  ) and Hubbell, (NYSE: HUB-B). Acuity Brands saw EPS of $1.03 last quarter for an annualized rate of $4.12. Based on this, Acuity Brands trades with a P/E multiple under 25. Hubbell, last reported $1.62 EPS. At an annual run rate of $6.48, that's a P/E of around 16.

Final foolish thoughts
While other lighting companies such as Acuity Brands and Hubbell, are making big profits here and now, there is only mere speculation that Revolution Lighting Technologies will turn a profit. Then, even if you take the most optimistic view, ignore management's blunders and consistencies, and assume perfect execution, Revolution Lighting Technologies is still overvalued compared to its peers.

Pay close attention to the words in its outlook and compare them to the future actual results. If they start to exceed materially, then Revolution could be a winner. If they continue to slip, run like the wind. For now, until management shows more light with its results, I will sit on the sidelines, safely in the shade, and watch.


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