The $4 LED Trend You Don’t Want to Miss

The opportunity to sell and install LEDs is enormous. We’re talking about over a billion lighting fixtures. And the areas with the largest potential — like parking lots — have barely begun to change.

While in Los Angeles, a CEO referred to this massive trend as “the LED curve.” It propelled his company’s sales up 266% in the first half of 2014. Yet the market hardly noticed, for a simple reason you’ll soon see.

Just take a look at the chart below…

LED_TransformativeTech

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This is the “LED curve.” Let me explain the huge profit potential of this curve.

LED stands for light-emitting diode. I’m sure you’ve heard of LEDs. For years, this was a hyped investment play. But the technology itself was not ready for prime time. Today, it is.

Why so transformative?

LEDs are the best source of lighting on the planet.

LEDs are different from traditional lighting.

The LEDs “are the size of a fleck of pepper” and use “a mix of red, green and blue… to make white light.” This according to a U.S. government website, which goes on to say:

“LEDs emit light in a specific direction, reducing the need for reflectors and diffusers that can trap light. This feature makes LEDs more efficient for many uses such as recessed downlights and task lighting. With other types of lighting, the light must be reflected to the desired direction and more than half of the light may never leave the fixture.”

LEDs also emit little heat. Incandescent bulbs release 90% of their energy as heat. Compact fluorescents lamps are not much better, at 80%. LEDs also last a really long time.

There is tons of stuff on this. Search the Web for “benefits of LEDs” and you get a staggering amount of material. I’ve only given you a small taste. I’m also skipping over the technical aspects of how it works.

This from the LIFX website:

“While incandescent lights last for a paltry 800-1,500 hours, and fluorescent lights last up to 10,000 hours, LEDs can last up to a staggering 60,000 hours.”

Using LEDs Saves a Ton of Money

For our purposes, though, what make LEDs especially interesting are the economic benefits of using them. Using LEDs saves a ton of money. Here’s a simple illustration I nabbed from Energy.gov:

Estimated cost of electricity to light a 6-foot tree for 12 hours a day for 40 days

TIRTable1

Estimated cost of buying and operating lights for 10 holiday seasons 

TIRTable2

Now, think about using LEDs to light parking lots… warehouses… office buildings. We’re talking billions of square feet of space. Many big companies have already made the switch. See the nearby graphic, which shows you that companies like Coca-Cola and Dollar General have already made the switch.

Switching to LED

SwitchingtoLED

The typical break-even for these corporate buyers is one-three years. After that, they enjoy a significant return on their investment in the form of lower lighting costs, saving them millions of dollars.

But it’s still early. The opportunity to sell and install LEDs is enormous. We’re talking about over a billion lighting fixtures. And the areas with the largest potential — like parking lots — have barely begun to change. Take parking, high bay and troffer — all lighting fixtures. Together, they represent about 10% of the LED market so far… but they represent 52% of the addressable market.

LargestPotentialMarkets

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This huge ramp-up is the “LED curve,” a big sweeping rise ahead as the market must eventually address its lighting needs. The old stuff will burn out and need replacement. And then people will sit down and do the same math Coca-Cola and Toyota and everybody else is doing.

Then they’ll buy LED systems.

And that gets us to our opportunity…

A Turnaround That Could Triple Your Money

I met with the CEO and CFO of a very special LED company in Los Angeles at the LD Micro Conference. The company is at the tail end of a turnaround.

“Two years ago, we had a management change,” the CEO said. He stepped in as CEO in September 2012. He inherited a messy and expense-laden firm. “We got rid of the corporate jet,” he said, giving you a flavor of where the company was.

The CEO and his team refocused the business. They dedicated it solely to LED lighting. In the last two years, they’ve cut all kinds of noncore businesses — solar, wind, ice chilling, all kinds of things. Plant efficiency improved 67%. He sold businesses and bought new ones focused on LEDs.

So here we are at the inflection point, the “tipping point,” as the CEO called it. “Now LED has become economically viable [and] economically justified, and the quality of light is better.”

And his LED business is on fire. Sales, as I mentioned, were up 266% in LED lighting. And past results still reflect businesses that the CEO closed and doesn’t have anymore. Plus there was an acquisition. So when you look at the results overall, you see nothing that gets you excited. If anything, the surface numbers for the first half of fiscal 2015 are ugly compared with 2014. But those numbers miss the big picture of the LED curve.

His stock is just $4.48 per share as I write.

Once the LED sales start to drive the overall results and its eye-popping growth becomes apparent, his stock ought to command a market multiple of at least around 15 times earnings.

Using those earnings estimates and slapping a 15 multiple on them gets you $6.60-16.65 per share. We could make three times our money in a few years on the high side of that estimate.

There are some downsides. If the CEO is wrong (or lying) he’d have to come to the market to raise money, probably by selling stock. That would drive the shares lower. Maybe 30% lower, I don’t know. Let’s call it 30%.

But if they are right, the upside is tremendous. There aren’t many times when you can legitimately map out a three- or four-bagger over a three-year period. This company could do that.

Besides, I’m not sure they’ll need the money. They have a cash balance of $11 million as of September. They also have targets for further expense cuts, an 11% reduction. So I think there is a good chance they can get past FY2015 without needing cash. By that time, the stock will be a lot higher, the profits will be rolling in and they will have more options available to them.

Finally, I want to say that technology matters in this business. It’s all about what cost savings you can deliver to your customers. And this company seems to be in a good competitive position. It has a rich patent portfolio of some 50 patents and another 41 pending. Many of its products operate at lower costs than competitors’.

When you include installation times and other factors, this company comes out even further ahead. Management walked through one example where they could install an office troffer (a kind of light fixture) in about one minute with no tools, versus a much more complex and time-consuming process used by competitors. The CEO also said his was the only company with a five-day shipping guarantee.

In summary, this is a business at the tail end of a transition from a clunky industrial to a high-growth LED company. We can already see this happening before our eyes. It just doesn’t screen well… yet. But soon it will be impossible to ignore the growth.

Now is the time to ride the LED curve, and this is the company to do it with.

Oh, and I almost forgot. Insiders have been buyers in the low $4 range back in May. That’s a good sign for us.

InsiderDirectors

Sincerely,

Chris Mayer
for The Daily Reckoning