When the Lights Go Down…

11/04/2011 2:50 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

China announced today that it will join the European Union and the United States and phase out incandescent light bulbs.

That has led to a big pop this morning in the shares of companies that produce alternative lighting systems, and those that make the equipment used to produce such alternatives as LEDs. That’s perhaps premature, since many of these companies are still reporting big drops in orders from customers in the consumer-electronics sector.

Starting in October 2012, China will ban the import and sales of 100-watt and higher incandescent bulbs. The ban goes into effect for 60-watt bulbs in October 2014, and on 15-watt bulbs in October 2016, according to the National Development and Reform Commission.

China is the world’s largest producer of both incandescent and energy-saving bulbs, such as LEDs. In 2010, China produced 3.9 billion incandescent bulbs, of which 1.1 billion were sold domestically.

The goal is to increase energy efficiency and reduce pollution—especially the production of greenhouse gases—in China. Light accounts for about 12% of China’s total electricity consumption.

Once the phase-out is in place, China estimates that it could reduce carbon dioxide emissions by 48 million tons annually. (The United States is set to ban the production and sale of incandescent bulbs starting in 2012. The European Union decided in 2008 to phase out the bulbs by 2012.)

Stocks popping on the news this morning include:

  • Cree (CREE), a maker of energy-efficient lighting, up 7.4% as of 1 p.m. New York time;
  • SemiLEDs (LEDS), a maker of LED chips and components, up 30.1%;
  • and two companies that make the equipment used to produce LEDs, Veeco Instruments (VECO), up 8.6%, and Aixtron (AIXG), up 10.3%.

All these stocks have been thoroughly beaten up lately, which is one reason that they’re jumping today. Aixtron, for example, trades at $16.48 today after this pop, but the 52-week high is $44.96.

And that’s also what gives me pause. These stocks have been crushed because orders from existing customers in the consumer-electronics and solar industries have fallen off a cliff. (The same equipment is used to produce solar cells and LEDs.) For its third quarter, for example, Aixtron reported a 49% drop in revenue from the second quarter and a 77% drop in its order rate.

LED prices have been falling—Credit Suisse projects a $10 drop in the price of a LED bulb by the end of 2013. Eventually those lower prices—and the incandescent bans—will drive a new level of demand.

But in the meantime, falling prices and the scaling back of subsidies in China have meant that LED makers have seen revenue fall—and that has resulting in falling orders, especially from China and Taiwan, starting in the second quarter of 2011.

A normal order bust cycle takes anywhere from two to four quarters to run its course, Credit Suisse estimates. That would peg a visible upturn in equipment orders at the middle of 2012.

In other words, the news out of China today is indeed good for these stocks, but a pop of this size may be a bit premature.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Aixtron as of the end of June. For a full list of the stocks in the fund as of the end of June, see the fund’s portfolio here.

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