Lumenpulse Inc. was the brightest of Canadian initial public offerings this year, at one point up nearly 50 per cent from its April debut. The maker of LED lighting systems was putting up impressive growth numbers in a potentially huge new market.
Investors have taken a dimmer view since, thanks to a significant sales miss in its most recent quarter and an ill-timed, poorly received insider stock sale.
To Lumenpulse bulls, this is a striking opportunity: A number of Bay Street analysts with "buy" ratings suggest a 12-month target price in the high $20s, double current levels. Yet even at today's depressed prices, Lumenpulse stock is trading at a rich valuation, with a forward price-to-earnings ratio of 77 – suggesting that Lumenpulse will have to dazzle over many years to reward its shareholders.
Certainly, its story is compelling. Lumenpulse's founder and CEO, François-Xavier Souvay, is a lighting-industry veteran who started the company in 2006. The company passed on the residential market, where the competition is more commoditized. Instead, its products are used commercially, primarily outdoors, at buildings such as BC Place Stadium in Vancouver, the Notre-Dame Basilica in Montreal, and the General Motors headquarters in Detroit.
By specializing in LEDs, or light-emitting diodes, the company is part of the future of lighting. LEDs are about 10 times as energy-efficient as old incandescent bulbs and last up to 150 times longer. Analysts believe the LED market can grow at a rate of 30 per cent or more for the next several years.
The company's results suggest an early lead: Its gross margins are in the mid-40 per cent range, higher than other LED manufacturers. It has a number of patents on its products. Analyst Thanos Moschopoulos of BMO Nesbitt Burns Inc., who initiated coverage on Lumenpulse this week, said his firm talked to its vendors and partners and was told by one that Lumenpulse is "the best in their space."
Alas, Lumenpulse's short life as a public company has been unpleasant. The company committed the cardinal sin of missing revenue and profit expectations badly, in only its second earnings release in September. It blamed "challenges in our manufacturing and supply chain."
Five days later, the company announced a $66-million stock offering consisting entirely of sales by insiders (including Mr. Souvay), who shed about a quarter of their holdings. (The insiders still hold 41.5 per cent of the company.) Investors reacted poorly, with the investment banks in the "bought deal" stuck with the shares at the $19.50 offering price, able to unload them only at a discount.
A buying opportunity? Jonathan Dorsheimer of Canaccord Genuity thinks so, saying his checks indicate the supply chain issues that contributed to the poor results have been resolved, and that investors have been "throwing the baby out with the bathwater." He has a $29 target price.
And while a nice, fat earnings beat or two may send these shares to that level in the next year, it's worth thinking about the long term.
Lumenpulse says its goal is to increase gross margins to 50 per cent and EBITDA margins – currently zero – to 18 per cent to 20 per cent in the next five years. This means it believes the added profit from selling more LEDs on top of its fixed costs will outweigh whatever pricing pressure it might feel from its competitors – which include several big players like Koninklijke Philips Electronics NV, who measure their sales in billions, versus Lumenpulse's $68-million in revenue over the past year. I'm not as sure Lumenpulse can continue to outperform the giants.
It's also worth noting that one of the reasons LEDs are so popular is that they last far longer than traditional bulbs – meaning that once the shift from traditional lighting to LEDs is largely complete in the coming years, there's not a lot of opportunity for repeat business, as Mr. Moschopoulos of BMO notes. He is bullish on the company's near-term growth prospects, but started out with a "market perform" rating, and $16.50 target price.
He says the stock's valuation isn't compelling based on his earnings forecasts for fiscal 2016, which ends in April, and he's not comfortable getting more aggressive farther out in the future. "Successfully delivering on this pace of growth, and on the associated margins that the Street is looking for, will require very strong execution (even if the end-market demand is there)."
I'll put it another way: The near term may get bright rather quickly. But in the long term, there's a real hazard that Lumenpulse shares will burn out long before its lighting systems do.