Investors Overreact to a Revolution-ary Contract

As you've probably heard by now, shares of LED lighting specialist Revolution Lighting  (NASDAQ: RVLT  ) popped by nearly 18% in Monday trading. But why?

One word: ignorance.

First, the facts
Let's start with what we know, and see if we can figure out whether investors were right to bid up the shares so high. According to the press release that Revolution put out Monday, the U.S. Navy's Military Sealift Command (MSC) contracted to buy 17,000 Seesmart 2- and 4-foot LED tube lamps. Further specifics on the lights were not provided. But Revolution has previously disclosed that its 15-watt LED tube lamp, for example, produces more than 1,700 lumens of light, and says it's "the industry's most efficient four-foot LED T8 lamp, utilizing the lowest wattage and generating the highest light output available." So far, so good.

We know, too, that MSC intends to install these lamps on the 14 newish Lewis and Clark-class Auxiliary Cargo and Ammunition Ships that General Dynamics (NYSE: GD  ) built for it over the past 12 years, retrofitting these relatively new ships with even newer lighting technology.

Now, the math
Revolution didn't disclose the value of this contract. But judging from advertisements available on the Web, these lights appear to retail for anywhere from $50 to $70 apiece. Presumably, the Navy got a discount for buying in bulk. But even if it paid full freight, this still gives a maximum value on Revolution's contract of perhaps $1.2 million for 17,000 4-foot tube lamps.

That's certainly a sizable contract for a company like Revolution, which did only $20 million in sales over the past year. Yet consider: The 17.6% spike in the shares yesterday -- $0.50 per share -- added not $1.2 million, but rather $40.8 million to Revolution's market cap. This seems a bit excessive given our estimated value of the contract. When you consider further that Revolution is earning negative profit margins on its revenues, the logic of turning even a $1.2 million sales contract into a $40.8 million increase in market cap seems even more tenuous.

Granted, in time this Navy deal could get bigger. If MSC decides it likes the product, and expands its purchases to retrofit, say, its entire 110-ship fleet, this could result in orders eight times as large as Monday's 14-ship, 17,000-unit contract. But even if that happens ... we'd still be looking at a sales contract worth less than $10 million.

Turning news this small into an increase $40.8 million big is quite simply ridiculous. Investors got carried away, and I suspect they'll rue the day.

Warren Buffett would not approve
Warren Buffett has made billions through investing in profitable companies that cost less than they were worth -- and he wants you to be able to invest like him. Through the years, Buffett has offered up investing tips to shareholders of Berkshire Hathaway. Now you can tap into the best of Warren Buffett's wisdom in a new special report from The Motley Fool. Click here now for a free copy of this invaluable report.

Read/Post Comments (5) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 17, 2013, at 10:28 AM, burger12 wrote:

    Ignorance is listening to a fool contributor who has no investment experience, is a shiv for the foolish shorts and cannot see the forest for the trees.

    Why people cannot see the revolutionary future of LED lighting is beyond me. Probably the same people who screamed that Microsoft will never beat Big Blue; No one will ever buy a personal computer, main-frames are where it's at...

    There are 57 BILLION light sockets in the USA alone. Estimates are 75% of all lighting will be LED by 2020. Simple math.

  • Report this Comment On December 17, 2013, at 1:33 PM, mscleaver wrote:

    How can a person who admits to zero credibility be allowed to post an article? This person has performed zero due diligence on RVLT. LED lighting is the future and that is confirmed. Why not mention the FACT that all incandescent 40 watt and 60 watt light bulbs are banned and outlawed in the United Stated effective January 1, 2014? Mention facts that RVLT just received a contract for the biggest landlord in NY city for LED retrofit. Mention facts, not speculation. RVLT is highly positioned to gain HUGE market share with LED lighting and lighting products. The author is incompetent.

  • Report this Comment On December 17, 2013, at 3:08 PM, TMFDitty wrote:
  • Report this Comment On December 17, 2013, at 7:01 PM, SeveauX wrote:

    This stock 2014 going hangs on the next earning report. Sure there have been a couple of changes that will turn out positive for RVLT. In the near future all change to LED, it's much cheaper and better for the environment. RVLT is a small cap for now but it's a major player with strong b2b relations, like the usa military for example. It focusses on functionallity with LEDs to be as efficient in use and function for all kinds of use. government, commercial businesses, industry and consumerbusiness. so in fact it delivers for everybody. gorvernment and business order major projects wich contain long relationships due Maintains being needed etc. Latest news said the US Navy contracted for a big deal. More will follow in industry and business sector because government deals holding ethic aspects as enviroment and earthfriendly advantages grow trust for others.

    That's how I think RVLT is strong in a way for the future and I think I share this with some.. allthough it really depends on the reports in 2014 because the market is allways very ADHD.. especially with a beta of 4.

  • Report this Comment On January 01, 2014, at 12:39 AM, timaiday wrote:

    You're right, It's in a zone that is difficult to trade. But i'm looking to buy when i see the bull is in total control.

    but ignorance! Seriously? Institutions are buying. They have all tools available. So you're saying institutions are wrong too. The market is always right. The market as a whole is always smarter than any single entity.

Add your comment.

DocumentId: 2767258, ~/Articles/ArticleHandler.aspx, 4/20/2014 5:20:39 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...