Are Acuity Brands and Cree the Best LED Lighting Plays?

LED lighting is set for strong growth, but don't expect Acuity Brands and Cree not to have some issues along the way.

Jul 12, 2014 at 10:03AM

Shareholders in lighting company Acuity Brands (NYSE:AYI) were given a rude reminder of the risk of holding a highly rated stock recently. The company's third quarter results missed estimates and the stock plunged more than 15%. But it might not all be so bad. Acuity's management doesn't give earnings guidance, so Fools should expect some volatility around the results. In addition, the company is attractive for a host of reasons, many of which also apply to Cree (NASDAQ:CREE) and Hubbell (NYSE:HUB-B). Is this a good buying opportunity in Acuity Brands?

Acuity Brands, Cree, and Hubbell: cyclical and secular growth prospects
Acuity Brands is attractive because it has cyclical growth prospects via an upturn in spending in the commercial and industrial construction sector. In addition, it also has a secular growth story from the growth in utilization of LED lighting. Given the company's P/E ratio of 33 times current earnings, it's reasonable to conclude that Acuity needs both these growth drivers to perform in order to take the stock higher.

The good news is that the indications from Cree's LED lighting results is that the secular story is very much intact. Cree manufactures LED products, lighting (LED based), and power and radio frequency products. In its latest set of results, LED products (which service a range of industries) only grew 3%, but Cree's LED lighting solutions grew 35% and now make up 44% of its total sales from just 37% last year. Moreover, Cree's management expects "double digit growth in lighting in both LED fixtures and LED bulb" -- good news for Acuity because LED lighting sales now make up a third of its overall sales.

As for the expectation of a cyclical pickup in lighting demand, investors need to appreciate that construction activity was held back in the winter due to severe weather. But Fools already know that anecdotal and industry data is pointing to a stronger second half for commercial construction. Hubbell, a rival company to Acuity, manufactures electrical systems, power systems, and lighting products for the residential and nonresidential markets. In line with the industry, its first quarter performance was hampered by the severe weather, but in a Q1 2014 earnings call Hubbell's management added, albeit tentatively, to the chorus of companies suggesting an uptick in construction activity: "[B]ut certainly we see some dynamics within the markets that may end up resulting in some upside going forward on the nonresidential construction." 

Moreover, Hubbell is interesting because its management commented that residential lighting was the strong area in the quarter, rather than weather-affected commercial and industrial lighting. In other words, commercial and industrial lighting was held back by the weather. Given that Acuity's core strength is in nonresidential lighting, it's reasonable to expect that Acuity's lighting results will improve with better weather in 2014.

Acuity and Cree display uneven growth
While the outlook for LED lighting looks assured, it's also likely to follow a variable growth pattern. There are a few special factors that Fools need to consider about the market.

One of the biggest deciding factors in making the switch from conventional to LED lighting is the cost efficiency of using a LED light. Simply put, there is pressure on LED manufacturers and lighting companies to spur adoption by lowering prices or investing in increasing LED efficacy. For example, in Cree latest quarter its management disclosed that its lighting margins were below expectations (lighting gross margins fell 320 basis points to 27.4% in the quarter to April) due to LED bulb price reductions.

Moreover, the mix of lighting products sold in the quarter will also affect margins for Cree and Acuity. On an adjusted basis, Acuity's gross margins fell by 70 basis points to 40.3% even while net sales increased by 11.5%. The reasons behind the fall were due to negative foreign exchange effects, a warranty issue due to a design defect in an older product, and a negative product mix shift. Acuity's management described the latter as a "temporary activity" that is "impossible to predict". Therefore, Fools shouldn't get too wrapped up in any one quarter's results, especially coming from a company that doesn't give earnings guidance.

Moreover, growth industries require growth products, and Acuity's investment in ramping up its electronic component capabilities reduced gross margins by 20 basis points in the quarter. Furthermore, management expects further investment to constrain gross margins "over the next few quarters." Acuity needs to make these investments because selling lighting controls (alongside LED lighting) is a key component of its growth plan.

Clearly, LED lighting is a growth industry, but it won't come without some bumps along the way.

The bottom line
The long-term outlook for Acuity is good. Cree is generating strong growth with LED lighting, and Hubbell is also seeing relative strength with its lighting solutions. Indeed, analysts have Acuity's EPS rising by 19% and 25% in the next two years. Good growth looks assured, but for the reasons discussed above, Fools can expect some volatility along the way. On a forward P/E of more than 23 times earnings to August 2015, the stock doesn't look great value right now, but it's well worth following for a future entry point.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Lee Samaha 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers