CREE: The Lights Are On

• By Ken Nagy, CFA
• On 3:48 pm EST, Wednesday February 11, 2009

Cree Inc. (NasdaqGS: CREE - News) is one of the leading producers of SiC and GaN-based light emitting diode (LED) chips. Only a handful of companies use Silicon Carbide (SiC) and Gallium Nitride (GaN) materials.

December quarter results exceeded the consensus on both the top and bottom lines. Forward guidance is for an 8-13% decline in the March quarter. The global movement to energy efficient lighting is prompting lighting companies and consumers to look at other options. Therefore, lighting will be the strongest end market for Cree, likely followed by video displays and notebooks.

Lighting Industry: Moving Toward More Energy Efficient Standards

With the signing of the energy bill in December last year, the U.S. government has decided to ban inefficient light bulbs by 2012. The energy efficiency standards set by the government effectively do away with incandescent light bulbs as we know them today. Although General Electric (NYSE: GE - News) has stated that it is developing a more efficient bulb that will meet the efficiency standards, a delay in development may actually put it out of the running.

The Australian government has already banned the usage of incandescents, which transfers users to CFL. The Irish government has also taken a decision to phase out incandescents by 2009. The EU is committed to converting a 5th of the block to efficient lighting by 2020. China, which currently makes 70% of the world's light bulbs, has agreed to phase out its incandescent production and shift to more energy-efficient products over the next 10 years.

The only viable alternative that is currently available is the CFL, although a lot of effort is on to develop whiter and brighter LEDs that could be used for lighting purposes. LEDs currently appear to be the most environmentally suitable alternative, and lighting solutions based on this technology are likely to become extremely popular over the next decade.

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