LED Sector Q1 2014 Performance

By Walter Borden

Light Emitting Diode (LED) demand continued in the first Quarter of 2014. LED fab utilisation rates have improved to high levels and LED adoption is happening faster than many had expected. LED customers are also reporting increased market demand for LED backlighting products. Many leading customers are placing orders for capacity expansions. Across the industry Q1 was a significant improvement over the last quarter of 2013 with higher revenues, better margins, and falling operating costs. Our work with privately held early stage start-up firms echoes what we hear from publicly trading firms and their coverage by leading analysts.

  • We believe that higher LED consumer usage combined with new and lower cost products, cost reductions, and higher factory utilization will help increase LED usage in residential and commercial real estate.
  • Unfortunately, stock prices in the sector generally have increased much more rapidly than earnings so investors may want to wait for a dip before entering the public market for LED stocks.

A look at Phillips N.V. is instructive. The Dutch conglomerate has reported flat earnings and generally lackluster revenue growth in the Q1 of 2014 with one exception. At Lighting, while sales were flat on a comparable basis, LED-based sales climbed 37 percent, and now represent 33 percent of total Lighting sales for the Dutch conglomerate.

Notably, then,  Phillips had a flat quarter while its LED unit continued to outperform rising 37% in the first Quarter of 2014.

Screen Shot 2014-05-13 at 11.39.34 AM
Source: http://www.usa.lighting.philips.com/

Meanwhile LED and Solar Panel Manufacturer Veeco saw healthy increases in revenue, gross profit, operating and net income in Q1 2014.

At Fund Balance we currently anticipate second quarter 2014 LED demand will be similar to or better than first quarter orders. We also see a continued rebound from industry wide weakness in 2012-13.

Our benchmark LED Motif/ETF, Leading The LED, like the broader LED and Materials sector saw significant profit-taking in Q1 2014, though we continue to like the long-term prospects for the industry and expect new surges in growth across the sector has consumer uptake continues to step-up. We would caution that falling prices will put pressure on margins so carfeul examination of revenue streams and operating cost trends will be essential for the active investor. Here is the a chart of Leading the LED with industry standard materials (with LED weighting biases) XLB (purple line) and VAW (orange line):

Screen Shot 2014-05-13 at 12.13.07 PM
Source: Motif Investing/Fund Balance/Walter Borden
Screen Shot 2014-05-13 at 12.15.14 PM
Source: Huffington Post

Lastly some recent comments in the Huffington Post on LEDs capture the consumer sentiment toward LED quite well in our view:

William Redhorn (NativeAmericanRepublican) I’m a licensed electrical contractor.

I push LED lighting at every opportunity. The price makes them a hard sell, but in a lot of cases using them prevents the necessity of running additional circuits, which could cost the customer more.

and,

 

Mark F. (kcwookie)  If I had a son, he’d look like me…

I’ve got most of my house switched to LED. They put out more light and are easy on the wallet.

Disclosure: Opinions herein are as of the posting date and are subject to change without notice. It is not a commercial offer or recommendation to buy or sell anything. Fund Balance may from time to time have a financial interest in concerns mentioned herein.