Cree: Looking Beyond the Short-Term Pain

Aggressive marketing, lower costs, and better products make Cree a good long-term investment.

Feb 5, 2014 at 3:30PM

Light-emitting diode lighting specialist Cree (NASDAQ:CREE) got off to a solid start in 2014. It posted robust second-quarter results recently, beating Wall Street estimates. However, the outlook was a mixed bag, as Cree's earnings are expected to be just short of analyst expectations.

With the gradual phase-out of incandescent bulbs complete, Cree is going all out to capture as much market share as possible, despite competition from General Electric and Koninklijke Philips (NYSE:PHG). But, this would come at a cost, and Cree is leaving no stone unturned by spending aggressively on marketing.  

As such, it won't be surprising if Cree continues to come short of analysts' earnings expectations in the short term. But then, it cannot be ignored that the company is seeing rapid growth in both the top and bottom lines, and the same looks set to continue.

For instance, in the previous quarter, Cree's revenue grew 20% from last year, while earnings were up a massive 54%. In the current quarter, if Cree manages to hit the mid-point of its revenue guidance, it would still grow in the mid-teens, despite seasonality and inventory reductions at one of its channel partners.   

Innovation-driven growth
Looking ahead, Cree expects its products to gain more traction, and it would be introducing more products to make the most of the LED opportunity. In the previous quarter, Cree's outdoor fixtures saw strong gains, and the company is looking to keep this momentum intact through new products.  

Cree has introduced a new series of outdoor lights that save 50% more energy than traditional high-pressure sodium lights. In addition, its CXB High-Bay Luminaire lights are expected to result in a 50% drop in energy costs, almost eliminate maintenance costs, and pay for themselves in three years.  

Another example of Cree's innovation is the fact that its new XLamp LED arrays are 68% more powerful than the previous generation, but consume 40% less power and are expected to last twice as long. These higher output arrays are used for commercial applications such as wall packs and canopies. Thus, through such innovations, Cree is looking to corner a bigger share of the outdoor LED market.

For the domestic market, Cree has continued to expand its product line-up. In the previous quarter, it introduced the 75 watt warm and cool white replacement bulb in an attempt to cover as much ground as possible before the holiday season. Also, Cree's marketing initiatives to spread awareness about its products further helped the company improve sales. The end result was a two-fold jump in LED bulb sales on a sequential basis in the previous quarter. 

Improving awareness and adoption
Going forward, Cree is working on further lowering the cost of its LED bulbs to drive adoption. In addition, Cree's bulbs also qualify for utility rebates since they are Energy Star-certified. According to management, this was another factor that drove sales.  

Looking ahead, it will be important for Cree to continue building its brand aggressively. According to CEO Chuck Swoboda, "Our brand strategy and marketing investment is unlike anything that has been done in lighting over the last several decades." The results are there for all to see, as Cree's bulb sales doubled in the previous quarter, and the company is looking to replicate such a performance in the spring.

Cree has been reinvesting profits into its marketing venture and will continue to do so. At the same time, the company is planning to lower price points going forward, but not at the cost of margins. This should help Cree appeal to a wider customer base going forward, and also compete more effectively with the likes of Philips.

Philips has priced its 60-watt replacement bulb at $9.97, bettering Cree's offering by $3 per unit. The lower cost of the Philips SlimStyle LED bulb is a threat for Cree. But then, Cree offers other advantages that might help tilt the balance in its favor. For example, Cree offers a 10-year warranty for its bulb, while Philips offers three years.  

In addition, Cree's offering is better in terms of power consumption, output, and yearly operational cost when compared to Philips. So, a further drop in prices on Cree's part should help it get even better going forward, compared to rival offerings.

The bottom line
Cree shares have performed very well over the past year, but there's still upside in store going forward. The LED lighting market presents a huge opportunity for the company -- to the tune of $94 billion, according to McKinsey. Hence, investors shouldn't be discouraged by Cree's steep trailing P/E ratio of around 75, since the stock is still capable of creating new highs this year.

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Harsh Chauhan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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