Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Cree: Looking Beyond the Short-Term Pain

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

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.

Retire with more money than you thought possible
It's no secret that investors tend to be impatient with the market, but the best investment strategy is to buy shares in solid businesses and keep them for the long term. In the special free report "3 Stocks That Will Help You Retire Rich," The Motley Fool shares investment ideas and strategies that could help you build wealth for years to come. Click here to grab your free copy today.

Read/Post Comments (0) | Recommend This Article (4)

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2825339, ~/Articles/ArticleHandler.aspx, 8/28/2015 8:54:58 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...

Harsh Chauhan

Harsh has been covering technology, and sometimes retail, since 2011. He is focused on finding great businesses for the long run. You can follow him on twitter @techjunk13

Today's Market

updated 11 hours ago Sponsored by:
DOW 16,654.77 369.26 0.00%
S&P 500 1,987.66 47.15 0.00%
NASD 4,812.71 0.00 0.00%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/27/2015 3:59 PM
CREE $26.93 Down +0.00 +0.00%
Cree, Inc. CAPS Rating: ***
PHG $25.90 Up +0.50 +0.00%
Koninklijke Philip… CAPS Rating: ****