TPS Trade Alert – December 16, 2015
Recommendation:
Buy Revolution Lighting Technologies Inc. (NASDAQ: $RVLT) up to $1.00 per share.
The Opportunity:
The future of light is the light-emitting diode (LED). It burns 100 times longer than a traditional incandescent light bulb, and 10 times longer than a fluorescent bulb.
More and more commercial and government buildings are making the switch. But even though the business is attractive, actually making money selling LED lamps hasn’t been easy.
In the fall of 2014, two global giants pulled out of the LED business.
Samsung and Philips each shut down their LED operations. Four years ago, Samsung said LED was a key business growth driver.
What happened? The commodity trap. Cheap LED imports from China. Price wars and eroding profits.
China’s LED business is booming, with a 30% growth rate.
But whenever global giants bail on a business where there is growing demand, opportunities exist for small and agile players to compete against the Chinese. This opportunity is what drew us to a small LED company in Stamford, Connecticut.
Revolution Lighting Technologies, Inc. $RVLT designs, manufactures, markets, and sells (LED) lamps and fixtures. The company operates in two segments… Lighting Fixtures and Lamps, and Lighting Signage and Media. The fixture and lamp business is solid, and the signage/media business is weak.
Revolution’s customers are governments, industrial and commercial facilities, multifamily real estate projects, hotels, restaurants, schools, and hospitals. Anybody with a big building where the lights are on.
It distributes and markets LED products through distributors, independent sales reps, and electrical supply companies, along with its own sales team.
Trade Rationale:
Revolution has the experience to innovate and the maturity to compete.
Q3 revenues were $37.7 million, compared to $26.9 million in the same period for 2014.
Gross profit for the quarter was $12.2, up 42% over 2014. Gross margin edged up to 32.3% from 31.8%.
The stock has slumped through a lackluster 2015. It started off the year at $1.39. Today, it trades at $0.86.
Investment Risks:
The big risk is competition from China. Even though supplies in China are tightening, you never know what kind of “diving for dollars” price cutting the Chinese will do to bring in a piece of business.
This is why we like Revolution’s focus on U.S. military and defense opportunities… hopefully the Pentagon would rather get LEDs from a company in Stamford than one in Shanghai.
(But it’s the government so logic doesn’t always prevail.)
This sector represents a significant hole in the market for Revolution to exploit.
Other risks…
There’s not much cash on hand for a rainy day. It would be good to see stronger short-term cash and equivalents on the balance sheet.
Expenses keep growing. Stricter cost controls are needed to deliver healthier margins. The good news about expenses: in Q3, there were one-time charges of $2.8 million.
We’re also skeptical when we see “Goodwill” assets continue to trend up. In the case of Revolution’s relationships with the government and the defense industry, this may be somewhat justified, but goodwill doesn’t pay the bills.
Over the past three years, the “Goodwill” line item has swelled to $69.9 from $42.9 million.
Potential Return:
We see Revolution slowly gaining strength over the next few quarters. We believe the stock is currently undervalued. In the summer of 2013, the stock traded at $4.92.
It’s not unreasonable to expect the stock to move back into the $4-5 range, but not within the next year. The rebound we anticipate is gradual, not sharp.
We forecast potential returns of 100% in the next year and 300% in the next three years.
Key Facts:
Company: Revolution Lighting Technologies Inc.
Ticker: RVLT
Recent Price: $0.86
Buy Up To Price: $1.00
Market Cap: $141.8 million
Avg. Daily Volume (3 month): 113,458 shares
Chart:
Category: TPS Trade Alert
