A Light in Dark Times

01/29/2009 1:00 pm EST


Michael Murphy

Former Editor, New World Investor

Michael Murphy, editor of the New World Investor, finds a stock that may benefit from the president’s new energy and infrastructure initiatives—and is debt-free.

Since the dramatic drop in solar stocks right after the election, money is flowing into the sector because it is an obvious beneficiary of whatever energy programs the Obama Administration proposes.

Another direct beneficiary is going to be Cree (Nasdaq: CREE), which reported a stellar quarter last week. Cree reported $147.6 million in sales for their December second quarter, up 24% from last year. However, that included a one-time licensing fee. They earned 14 cents a share pro forma, not counting the five cents attributed to the licensing fee, [while] the consensus was looking for only nine cents. Management forecast March quarter revenues in a range of $128 million to $135 million, with pro forma earnings of ten cents to 13 cents a share.

Lighting is the reason we own Cree. During the quarter, they announced volume production of the LR24, which replaces the common fluorescent fixtures in suspended ceilings. During this quarter, the Pentagon will begin installing 4,200 LR24 fixtures as part of a major renovation.

During the campaign, President Obama visited Cree's facility. I expect him to order a wholesale replacement of government incandescent and florescent lights by light-emitting diode (LED) lights, beginning with the obvious parking garage and loading dock applications.

LEDs have pretty much taken over the mobile phone display business, especially at the higher end. Laptop computers will be next, with LED displays replacing liquid crystal displays (LCDs) beginning in the second half of this year. At the same time, the LR24-type fluorescent fixture replacement market will start to grow in earnest in the second half of the year, if only from Obama's [likely] Federal government initiative.

The fourth driver of LED demand will be the conversion of LCD TVs to LED TVs. Look for the first, expensive products to be widely available for Christmas 2009, with explosive growth beginning in 2010.

On the conference call, several analysts seemed surprised that Cree is doing so well. I expect to see them increase their June 2009 fiscal year estimates from the current 42 cents and, especially, their June 2010 estimates from 52 cents. They are way low on 2010; I believe Cree will earn 75 cents or more next fiscal year regardless of the recession. With $360 million in cash and no debt, they are in excellent financial shape.

Cree is not dirt-cheap, at around 28x my June 2010 estimate and about 20x my 2010 calendar-year estimate of $1.00. But it will grow 20% to 25% a year each of the next five years, well above the 16% growth Wall Street expects, and should be recession-proof.

CREE remains a very timely Top Buy in spite of the recent price jump, all the way up to my $22 limit for a $50 target. (It closed at $21 Wednesday—Editor.)

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