Everybody should go to Las Vegas at least once, if only to experience gaudiness
and flash in their purest form which brings us to my latest recommendation,
Color Kinetics (Nasdaq: CLRK).
What does it sell? Color Kinetics provides sophisticated light-emitting
diode (LED) systems and technologies. Its main products are programmable,
customized colored lighting systems and software for interior and exterior
accents, signage, entertainment, landscaping and displays.. It also makes white
LED fixtures and lamps and original equipment manufacturer (OEM) products. It
sells in North and South America, Europe, Asia and the Middle East, and recently
set up an office in China.
(LED’s are basically small non-filament bulbs in an electrical circuit. They’re
illuminated by the movement of electrons in a semiconductor material and last 15
or 20 times longer than an incandescent light bulb without getting especially
hot.)
Who buys it? A big piece of business currently comes from theatrical set
designers, aircraft engineers and customers like Hard Rock who need specific
customizable equipment for large projects. The market for such work is a
conservative $7 billion worldwide annually. There’s also a growing white LED
market for non-industrial consumers who just want effective, inexpensive
low-maintenance light. This is still a small piece of the pie but it should grow
as the technology improves and prices fall; Color Kinetics is focusing hard on
it. (White LED can be programmed to be sensitive to changing light levels and
should find a solid niche in home and retail decorating.)
Why is this a company to watch? For one thing, a few years ago Color
Kinetics installed a system at Las Vegas’s Hard Rock Hotel & Casino, enveloping
the entire outside of the building in a continually-changing curtain of colors.
Yes, it drew many onlookers who eventually wandered into the casino, but even
better, the cost of lighting the building’s exterior dropped from $18,000 to
$2,000 a year. And because the long-lasting LEDs eliminate the need for staff to
constantly change bulbs, the Hard Rock saves another $24,000 a year in bulb and
maintenance costs. Color Kinetics has also installed its systems in Dave &
Buster’s restaurants, Harrah’s casinos, Marriot hotels, and Limited Too kids’
clothing stores, to name a few.
Some companies have divisions that provide and install customizable lighting.
But there isn’t any serious direct competition in advanced, “intelligent”
colored LED systems, especially since a small rival just lost a sweeping patent
infringement case to Color Kinetics, which should help form a sure footing for
future products.
The numbers. After hitting a high of $23 in May the stock fell sharply —
not on first-quarter revenue, which was up 27% to $14.7 million, nor on overall
gross margins, which were a record 54%, but on earnings after options-related
accounting: That was $188,000 or one cent a share, down from last year’s
$672,000 or three cents. Without this expense, income would have been $729,000
or four cents. The stock paid the price for the company’s generosity to
employees, finishing the day down $4 or over 16%. It then fell prey to the
savage earlysummer decline in the market, dropping another $5.20 or 26%. It now
seems to have found a floor around $14.25, trading recently around $15.
Insiders are confident enough to own some 25% of the company and there’s
sufficient institutional ownership, around 50%, to give trading some heft. The
company has $56 million in cash on hand, over $2 million in operating cash flow
and one of my favorite things, zero debt. At 78, the trailing-12-month
price-earnings ratio is a bit high, but that’s slated to drop to 37 by the end
of 2007.
The future. The stock has eight days of short interest which should
support the price in the event of good news, like the recent announcement of a
$1.7 million grant from the Department of Energy to develop an LED-based
alternative to incandescent lamps. If this project goes well, the company could
see considerable, and possibly recurring, revenue. The other day Color Kinetics
signed Dialight, a U.K-based LED firm, as a new licensee for its portfolio, in
the process gaining access to Dialight’s patents.
Why buy? Color Kinetics has unique products, improving revenue, a growing
market for both its colored-light and white-light lines, a wide competitive edge
and a depressed stock price. If the company can just control those options
expenses, the stock looks very attractive. (Remember to keep a trailing 10% stop
price on the first half of your position. When that sells, reset the stop on the
remainder.)
