Goodbye, CFLs: General Electric’s Ditching Them for LED Bulbs

The following has been republished from Rich Smith of The Motley Fool. You can view the original article here.

General Electric’s (NYSE:GE) Appliances and Lighting division produced $8.8 billion in sales for GE last year. The company tried to sell the appliances half of that division to Electrolux, failed, then lit upon Haier as an alternative buyer. But GE kept tight hold of its lighting division.

And now it’s doubling down.

Present at the inception

Why is GE holding on to its lighting division, even as it parts with appliances? It could be as simple as this: GE is light bulbs.

The company that Thomas Edison founded is so well known for light bulbs, in fact, that its famous 80’s tag line “We bring good things to life” is often misquoted as “We bring good things to light.” Yet GE has evolved over the years from a maker of incandescent bulbs (which are on their way out) into the top-rated seller of compact fluorescent light (CFL) bulbs on Amazon.com, and into a specialist in LED lighting today.

As reported on Bloomberg earlier this week, GE has just announced plans to discontinue production of CFLs entirely, and focus on LEDs instead. The switchover is slated to be complete by the end of this year. Although much more efficient than the incandescents they replace, CFLs are not always popular with consumers. They cost more up front than incandescents, and are less efficient than LEDs — resulting in less cost savings over time.

Now, caught between the proverbial rock and a hard place, CFLs may be going the way of the dodo. According to Bloomberg stats, nationwide CFLs control only a 15% share of the lighting market, and that’s declining. LEDs have 15% as well, but that share is growing, and GE predicts that by 2020, LEDs will represent 50% of all light bulbs used in the U.S.

Perhaps most important, because LEDs are essentially microchips writ large, they offer versatility that appeals to GE as a means of widening its “smart home” market share — by linking lighting to smartphones via Bluetooth, for example, or even using light bulbs to extend Wi-Fi ranges within the home. And the fact that LEDs can sell for as much as five times the price of CFLs? That’s just gravy.

Hold up a sec. What was that about LEDs and microchips?

LEDs — light-emitting diodes — are basically just semiconductors that emit light when activated by electricity. That means that for investors interested in riding General Electric’s coattails into this industry, there are a whole lot more investing opportunities than just buying GE stock itself.

Here are three of them.

Veeco Instruments

With a market cap of only $760 million, small-cap Veeco Instruments (NASDAQ:VECO) offers arguably the greatest potential to grow alongside growing consumer interest in LEDs. Veeco makes the equipment that makes LEDs. It’s not profitable at present, but generated $54 million in free cash flow last year, according to data from S&P Capital IQ. Weighed against the company’s small market capitalization and large cash hoard ($400 million, and almost no debt), that works out to an ultra-cheap enterprise value-to-free cash flow ratio of just 7.5.

On the minus side: Veeco earned no profit in 2014, or in 2015, either, and is expected to lose money in 2016 as well before returning to profitability. For a price this cheap, “You pays your money and you takes your chances.”

Cree

Investors seeking clearer growth prospects might prefer to look at the granddaddy of LED investments, Durham, North Carolina-based Cree (NASDAQ:CREE). Cree sports a $2.8 billion market cap, and more than $400 million (net of debt) in the bank.

Like Veeco, Cree is currently unprofitable from a GAAP standpoint. But also like Veeco, Cree generates copious piles of cash from its business. In fact, the past 12 months saw Cree generate $102 million in real cash profits. That works out to an enterprise value-to-free cash flow ratio of just 23.5 on the stock. If Capital IQ estimates of Cree growing its profits 38% annually over the next five years are anywhere close to correct — Cree could be a bargain.

Applied Materials

Like the idea of investing upstream in LEDs, but don’t like the idea of buying stocks that don’t earn GAAP profits? Applied Materials (NASDAQ:AMAT) is an LED equipment-maker like Veeco. But unlike Veeco, Applied Materials made $1.4 billion in profits last year. Granted, only 69% of that ($948 million) was backed up by real free cash flow, so the stock’s EV/FCF ratio isn’t as pretty as its P/E. But with a price-to-earnings ratio of only 15.3, and a growth rate of 15.3%, Applied Materials looks pretty cheap anyway.

Bonus points: Applied Materials pays a 2.3% dividend.

And there you have it folks. Three stocks that, like GE, hope to ride the wave of consumer adoption of LEDs over CFLs. None of them have the size, scale, or name recognition of General Electric, but for investors hoping to sneak in on the ground floor of the LED phenomenon, that might work to your benefit.

At these low prices, it certainly can’t hurt to look. You just might bring a great bargain to light.

Er, life.

Denver Lighting Manufacturer Adds Two to Board

Bob Grant, Robert C. Hawk to Help Guide Commercial LED Light Maker

DENVER, Colo. – (Jan. 26, 2016) – START Lighting, a Denver-based manufacturer of high-quality LED products for the commercial electrical industry, today announced that Bob Grant and Robert C. Hawk have joined the company’s board.

Bob Grant brings more than 25 years of experience as a senior executive to his new role with START Lighting. Mr. Grant’s experience spans a wide range of companies, from Fortune 100 to start-ups, with a focus on services and technology. He has held executive roles in sales, marketing and business development in high-tech companies including EagleView Technologies, Alliente (acquired by Ariba), Ligos Corporation, Covad Communications (IPO) and US WEST (merged with Qwest). Bob Grant is an angel investor and advisor to several high-tech startups in the Denver area and holds a Masters of Science in Management from the MIT Sloan School of Management (Sloan Fellow 1988). He has served on the board of several companies and non-profits.

Robert C. Hawk is president of Hawk Communications, whose mission is to help develop high technology companies. In 1997 he retired as President and CEO of US West Multimedia Communications, Inc., where he was responsible for the Media 1 cable business and the Time Warner partnership. From 1986 until 1995, Hawk was president of the Carrier Division of U S West Communications, Inc. From 1997-2002, he served as a Special Limited Partner of Crosspoint Venture Partners, helping take 16 companies public in board and advisory roles. He is currently a Special Limited Partner of DCM capital management and Miramar Venture Partners and serves as a director of several private high technology companies.

“We are incredibly excited to welcome these two accomplished and gifted businessmen to our board,” said Jason Barbour, START Lighting’s CEO. “As we aim for a new era of growth, I know their wisdom and knowledge will be a major contributing factor to our success.”

About START Lighting

START Lighting manufactures high quality LED products for the commercial electrical industry. Producing both off-the-shelf and customized solutions, START Lighting provides innovative solutions to commercial lighting challenges. By cutting product development time from months to as little as a week, we can produce custom-made lighting products faster than competitors while still meeting our rigorous performance and quality standards. To find out more, please visit www.start-lighting.com.

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