Roth Capital: Price Increases Widely Expected after 1 Jan to Offset Continued Steel Cost Escalation

ROTH Lighting Survey: DecQ Growth 300bps Above Prior Estimate; Outlook Stronger

We surveyed 50 lighting agencies to quantify changes to channel/market momentum, and gain insight on pricing and technology adoption. Respondents pointed to ~5.5% recent market growth, well above the tepid outlook expected from our Sept survey. The majority of participants were also optimistic for a solidly positive inflection in activity following the election, with median expectations shifting to above 5% MarQ growth. Announcements of fixture price increase have abated, but fresh increases were widely expected after 1-Jan to offset continued steel cost escalation.

  • We collected survey responses from 50 U.S. lighting agencies to quantify changes to market momentum, and gain insight on product pricing and tech adoption. Respondents included 22 companies [46%] in the eastern time zone (FL, GA, MA, ME, MI, NY), 11 companies [20%] in the central and mountain time zones (CO, IA, IL, TN, TX, UT), and 17 companies [34%] in western and Alaska time zones (AK, CA, NV, WA). Survey participants represented around $1 billion in annual in lighting product sales.

  • Respondents indicated volumes in the most recent quarter were up ~5.5%, and pointed to a similar March quarter outlook. Detailed results including survey questions and response histograms are included inside this report. Notably 42% (14) of 33 repeat respondents reported performance was above their prior expectations, with 42% inline, and only 15% (5) below. We heard repetitively that the election had many customers defer project starts, particularly in federal/government markets, but most should now resume.

  • LED fixtures price erosion appears to continue decelerating, with a median of (5%) price erosion, and many saying pricing is flat or seeing modest increases. We believe LED fixture prices should see slowing price erosion versus prior years, driven primarily by lower LED component contact costs, and would look for average erosion in the low single digits during 2017.

  • The tempo of OEM price increases has slowed significantly, but most expect fresh price increases on 1-Jan. to offset continued steel cost escalation. Only four agencies reported major price increases, while 21 discussed major increases in our prior survey. The pricing achieved during 4Q16 after the 30% run in steel prices during 3Q16 will be an important factor for OEM fixture producer gross margins. Typically only a portion of any price increase sticks, and agencies usually push back hard on increase given knowledge of uneven application by different fixture OEMs.

  • We expect all lighting companies in our coverage to see a benefit from improved market activity, with more of a benefit for those with a higher mix of quick book and ship business. We are upgrading shares of Lumenpulse (LMP.TO-Buy) to Buy from Neutral for higher probability the company will achieve the large Q/Q revenue ramp forecast for F4Q17. Our top picks remain Revolution Lighting (RVLT-Buy), and Cree, Inc. (CREE-Buy), where management at both companies issued conservative guidance and could see modest upside execution. We also like LSI Industries (LYTS-Buy) for longer-term positioning, acknowledging increased activity is more likely to lift March and June quarter performance due to a longer typical sales cycle. We would use possible upside for Acuity Brands (AYI-Neutral) as an opportunity to lighten positions. We remain on the sidelines for both Orion Energy (OESX-Neutral) and Energy Focus (EFOI- Neutral) given larger execution issues at both of these companies. 

    Read the complete report here.