Last year, Americans purchased over 4 billion light bulbs, according to the U.S. department of Energy. With recent legislative changes ensuring future use of more energy-efficient lighting solutions, IMS Research expects sales of LED bulbs will become a $10 billion market by 2015.
According to the New York Times, about 33 million LED light bulbs were sold in 2012. Within about four years, purchases will likely increase 1,000%, to more than 370 million LED bulbs!
While many LED manufactures are benefiting from this lighting boom, one public company in particular is profiting -- international LED and semiconductor manufacturer, CREE (CREE).
CREE boasts an outstanding fundamental outlook and is backed by highly bullish technicals. This year alone, the stock already increased about 45%! But, as I explain below, the technicals point to much further growth potential ahead.
Helping drive the stock is recent news CREE developed what management terms a "game-changing" LED bulb. This bulb, which fits into any standard lighting receptacle, is designed to last up to 25,000 hours -- that's 25 times longer than a traditional incandescent bulb! In fact, CREE is so confident in its technology, the bulb comes with a ten-year warranty.
Up till now, LED bulbs have been expensive. But, CREE's new light bulb -- sold exclusively at Home Depot (HD) -- will go for just under $10. Best yet, the bulb is expected generate 84% more energy savings than a traditional light bulb. And, unlike many current compact fluorescent bulbs, there won't be any lag-time when the light is turned on. Instead, it will illuminate instantly. The color is also said to be soft and warm, which until now, has been difficult to achieve through LED lighting.
From a technical perspective, shareholders certainly appear bright-eyed.
At the beginning of 2013, the stock traded just over $30. In less than three months, it has jumped over $20 and shows no signs of slowing down. Shares currently appear to be bullishly emerging out of a multi-year basing pattern.
The beginning of the pattern formed in December 2010, when the stock hit a high of $72.85, then dropped. The low, or base, of the pattern represents key support, near the low-$20 level. The stock touched this support level about four times during 2011 and 2012. However, support held and the stock managed to retain strength.
In October 2012, shares hit a low of $24.50 then jumped several dollars the following week. This trading activity marked the beginning of an accelerated uptrend line. The stock has been on a tear since.
This week, shares jumped nearly $8 on upbeat third-quarter guidance. The stock is currently trading at a 52-week high, near $53. While there is some historical overhead resistance near the $57 level, if shares can sustain bullish momentum, they could retest -- and even exceed -- the multi-year $72.85 high.
According to the measuring principle for a basing pattern, calculated by adding the height of pattern to the breakout level, shares could potentially reach a new price of $125.45 ($72.85-$20.25=$52.60; $52.60+72.85=$125.45). At current levels, this target represents whopping 138%+ returns!
The bullish technical outlook is supported by strong fundamentals.
On anticipation of strong sales of its new LED light bulb, CREE increased guidance for upcoming third-quarter results, to be reported April 22. Management now expects revenue to be in the range of $335-$350 million, up from previous estimates of $336 million. This new target represents 18% growth, compared to $284.8 million in sales during the year-ago period. For the full 2013 year, analysts project strong demand for the company's LED products will cause revenue to rise 16.6% to $1.4 billion, from $1.2 billion last year.
The earnings outlook is similarly optimistic. On expected demand for its LED bulbs, management raised the third-quarter earnings outlook to the range of $0.31 to $0.36 per share, from previous estimates of $0.33 per share. This increase represents at least a 40.9% gain from earnings of $0.22 per share in the comparable year-earlier quarter.
For the full 2013 year, analysts project earnings will jump 35.8% to $1.29 per share, from $0.95 per share last year.
In addition to a solid fundamental outlook, the company is in a cash-rich position with $855.8 million in available cash and no long-term debt. This financial liquidity should give the company the ability to continue researching and developing innovative new lighting products.
Risks to consider: Competitors such as Osram (privately held) and Philips Lighting (PHG) are likely working on their own versions of a "game-changing" light bulb. For CREE to maintain its current status, the company cannot rest on its laurels. It will need to continue developing innovative new products that change lighting as we know it. However, CREE's new $10 light bulb should help drive success into the foreseeable future.
Recommended Trade Setup:
-- Buy CREE at market price
-- Set stop-loss at $33.43, slightly below current support
-- Set initial price target at $72.85 for a potential 38% gain in six to eight months; if exceeded, set a secondary target of $125.45 for a potential 138% gain in about a year