A Pair Trade In The LED Space: Buy Cree, Sell Acuity

Companies in the lighting industry are facing margin pressure and are seeking to “diversify away from pure device manufacturing,” JMP Securities’ Joseph Osha mentioned in a report. He initiated coverage of Acuity Brands, Inc. (NYSE: AYI) and Cree, Inc. (NASDAQ: CREE), saying that these leading players were among “a limited number of pure-play investments available to investors in U.S. equities.”

While lighting equipment and controls generate revenue of $60 billion annually, another $15 billion is contributed by discrete LED devices. “New lighting technology and advances in control and intelligence are driving rapid change in the industry,” Osha wrote.

Sell Acuity Brands

Osha initiated coverage of the company with a Market Underperform rating and a price objective of $200. Acuity has strong execution and has successfully integrated a series of acquisitions. Management seems to “understand the importance of effectively engaging design partners and the distribution channel.”

The analyst added, however, that the consensus expectations already reflected a “near-perfect” outlook for the next couple of years.

Buy Cree

Osha initiated coverage of the company with a Market Outperform rating and a price objective of $32. The performance of Cree’s LED device business has been flat and the company has just initiated steps to get its lighting products business back on track.

The analyst noted, however, that cash generated from the impending sale of Cree’s power and RF product business and the recent hire to head the lighting products business created “some interesting opportunities” for the company.

“We acknowledge the high cash flow multiple but believe that the potential for improvement off a low base merits our stance,” Osha commented.

At last check, shares of Acuity were down 2.22 percent at $248.96. Cree shares were up 1.99 percent at $27.21.