Cree’s new $10 LED light bulb should increase the company’s operating profit by more than $40 million in 2015 – a boost that would augur well for its stock price.
That’s the conclusion that Andrew Huang, an analyst with Sterne Agee, came up with this week after running some profit projections for the Durham company’s new product and dissecting the past performance of its stock.
Earlier this month Cree unveiled a new LED bulb, the equivalent of a 40-watt incandescent bulb, that retails for $9.97 exclusively at Home Depot – 50 percent less than some competing LED bulbs. Cree also launched 60-watt equivalents that retail for $12.97 and $13.97 at Home Depot. Its bulbs last about 25 times longer than an incandescent bulb and use about 85 percent less energy.
Cree’s shares jumped 14 percent the day of the announcement, but some analysts fretted that the move would hurt the company’s profit margins. Cree produces its own indoor and outdoor light fixtures as well as components that other companies use in their lighting products. Its LEDs also are used for illuminating car dashboards, mobile phones, televisions and signs.
However, Huang’s historical analysis found that the company’s operating profit, rather than its profit margin, was the best indicator of its stock price.
“We believe investors are likely overly focused on the gross margins of the new bulb,” Huang concluded.
Huang projects that the company’s operating profit stemming from the new bulbs should rise from $3.7 million this year to $41.8 million in 2015. As a result, he’s forecasting that the company’s total operating profit for the fiscal year that ends in June 2014 would hit $261 million – 20 percent higher than the consensus estimates of his fellow analysts.
Huang’s projections are based on the assumption that Cree’s technological prowess will enable it to rapidly lower the cost of the LEDs in its bulbs by about 30 percent by 2015. “We feel very comfortable with our assumption,” Huang wrote.
To be sure, that would boost the profit margin on the bulbs as well. But the increase in the operating profit is much more relevant, Huang stated.
The markets were closed on Friday, but Cree shares closed Thursday at $54.71, up 34 cents. The company’s shares have more than doubled since July, and reached a 52-week high of more than $55 last week.