SPECIAL ALERT – Adding LSI Industries to the Tematica Investing Select List
-
We issuing a Buy rating on shares of LSI Industries (LYTS) as we add them to the Tematica Investing Select List with a $10 price target.
-
LSI Industries is poised to benefit from post-hurricane rebuilding as well as the overall shift to light emitting diode (LED) lighting vs. conventional lighting technologies.
-
Given the sharp move higher last week – more than 17% – we would not chase the shares much past $7.25; rather we will be patient and look to improve our cost basis should the shares fall back to Earth near $6.00
Yes, we’re in a buying mood this morning. After issuing a Buy rating on Nokia (NOK) earlier this morning, we’re back again with a second new Buy rating, this time on a firm poised to see a surge in demand as the rebuilding process takes hold in Florida and Texas.
Over the last few weeks, we’ve heard quite a bit about the destruction following the one-two punch of Hurricanes Harvey and Irma. People are without electricity, water, food and other essentials and we’re starting to see the economic impact reflected in GDP forecasts for the current quarter. Late last week, the Atlanta Fed joined with forecasters from Bank of America (BAC) and Barclays (BCS) in reducing their GDP estimates by 0.8 percentage points. The dourest is Goldman Sachs (GS), which lowered its forecast by 0.4 percentage points, to 1.6% growth in the quarter.
The somewhat silver lining in all of this is the flooding and other damage means having to replace homes, offices, cars, clothing, and electronics as well as rebuilding affected infrastructure. We’re hearing reports of damage to wastewater systems, which means a shift in capital spending there as water utilities aim to bring clean drinking water back online. The same rebuilding spending will include lighting both in homes, offices and other nonresidential construction as well as signage and other lighting applications.
This brings us to LSI Industries
LSI Industries (LYTS) derives the bulk of its revenue from its lighting and graphics businesses. Its lighting segment manufactures and markets outdoor and indoor lighting and lighting controls for the commercial, industrial and multi-site retail markets, including the quick-service and automotive markets. The Graphics segment manufactures and sells exterior and interior visual image elements related to signage and graphics, including integrated digital solutions. Markets served include automotive, grocery, quick service restaurant, parking garage, banking, petroleum retail stores, and retail among others. Representative customers include Burger King (QSR), Wendy’s (WEN), Costco Wholesale (COST), Walmart (WMT), Kohl’s (KSS), Lowe’s (LOW), Chevron (CVX), Toyota (TMC), US Bank (USB), Nasdaq (NDAQ) and Coca-Cola (KO). While we acknowledge the long-term prospects for a number of retailers is questionable given headwinds associated with our Connected Society theme, near-term rebuilding by these and other customers bodes well for LSI in the coming quarters.
Across those two businesses, LSI utilizes light emitting diode (LED) technology that is far more power efficient than other forms of lighting (incandescent, cathode ray tube), is solid state (which reduces breakage and offers a far longer life than other lighting technologies) and emits far less heat. Applications for the technology range from signage to general illumination and others that have long life cycle requirements. Even though the technology has been around for years, it is still disrupting the existing lighting market and will continue to do so as LED prices continue to come down. Those price erosions drive lower replacement costs compared to those other lighting technologies. We’ve mentioned this disruption to subscribers before in comparing the expected adoption of organic light emitting diodes that is driving our Universal Display (OLED) and Applied Materials (AMAT) shares. Near-term OLEDs will disrupt smartphones, TVs, wearables and interior automotive applications, but it will be some time before the technology matches the brightness strides that have been made with LEDs.
As you might be thinking, LEDs are a far more “green” friendly form of lighting. We’ve seen massive investment in LED technology over the last several years, including ramping manufacturing capacity in China. This has led to significant price erosion for LED lighting, which has opened up a number of applications as LED pricing approaches parity with other lighting technologies. This bodes well for LSI’s project input costs, margins, and EPS.
Why We Think the Timing is Right for LYTS Shares
What makes this an even more interesting addition to the portfolio is the recent hit to LYTS shares following disappointing guidance. But here’s the thing, the company missed EPS by 2 cents a share and revenue by less than 4% relative to expectations. It still delivered positive growth year over year. The result, as we’ve come to expect was a clobbering in the shares, which fell to nearly $5 from almost $9 several weeks prior. We’ve seen the shares rebound of late, and we attribute that not only to the potential hurricane spending to be had, but also LSI’s quarterly dividend. Historically LSI shares bottomed out near a dividend yield of 2.6% over the last four years. The current dividend yield is 3.0%, which in our view confirms the recent fall off is more than overdone and the eventual post-hurricane rebuilding should serve as a positive catalyst for the shares.
As such, we are beginning this position today with a $10 price target. That figure equates to a dividend yield of 2% vs. the 1.5%-2.0% dividend yield the shares have peaked at over the last several years. In our view, the looming pick-up in rebuilding activity as well as the overall shift to LED lighting bodes well for the company’s business and should leave it well positioned to deliver meaningful EPS growth in the coming quarters. As such, we are adding LYTS shares to the Tematica Select List with a Buy rating. Given the sharp move higher last week – more than 17% – we would not chase the shares much past $7.25; rather we will be patient and look to improve our cost basis should the shares fall back to Earth near $6.00.
