What Philips' Spinoff Means for Cree in the Lighting Business

NEW YORK (TheStreet) -- Dutch electronics giant Philips NV (PHG) is spinning off its LED production and automotive lights operations into a standalone company in a move that creates a new challenge to Cree (CREE) and other companies in this fast-growing lighting-systems business.

That is because Philips isn't spinning out its entire LED business, just the production end. It will keep its business of creating lighting systems, a higher-margin business that will go head to head with Cree. But investors may still want to consider Cree as a pure play in LED lights and lighting systems.

For Philips, the money is in the lighting systems, not the lights themselves. There's an entirely new business growing in lighting systems, turning lights on and off automatically in reaction to movement. That requires new software and system integration common to the computer industry.

"After significantly improving the performance of Lumileds over the last few years, and establishing strong intellectual property, we now see that this business can further grow, attract more customers and increase scale as a standalone business," Philips spokesman Steve Klink said.

Cree makes both the LED bulbs and the systems as does General Electric (GE). Another major Western company in the field is Osram, which was spun off from German industrial conglomerate Siemens (SI) last year.

These Western companies face competition from China, whose government heavily subsidizes LED producers in the country. But a more aggressive stance against the Chinese subsidies could help the Western companies, including Cree, and move its stock higher.

Cree options are showing a bullish trend, although Schaeffer's Investment Research speculates the trend is being an offset by short sellers betting the stock will fall further from here.

That may be because with the capital investments required to build a lighting-systems business, the short-term outlook for Cree is choppy, with sales growth slowing and earnings growth hard to come by.

But investors may want to bet on a favorable long-term outlook for the business of lighting systems and buy shares of Cree at current levels. The stock was trading recently at $50.24, up 3.6% late Monday morning. It has fallen 21% during the past 52 weeks, including today's gain.

An official from Cree wasn't immediately available for comment.

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At the time of publication, the author owned shares of GE.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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