Take Me to Your LED Leader

If you're one of them, run down to Home Depot (HD) and buy enough screw-in fluorescent bulbs for every light in your house. They cost a bit more than incandescent bulbs but are vastly more efficient. Incandescent bulbs produce just 16 to 22 lumens (a measure of perceived light) per watt (a measure of power). Fluorescent ones generate about 80 lumens per watt. Make the investment today, and you'll be in the plus within a year.

When you're done screwing in your new bulbs, consider buying shares of Genlyte Group (GLYT), a Louisville, Ky., lighting outfit. It turned up recently in our Midcap screen, which looks for promising medium-sized companies. The screen searches for things like solid returns on equity, share-price momentum and modest valuations. See our recipe of criteria for details and use our stock screener anytime to run the search for yourself. It recently pointed to Genlyte and seven other stocks from a starting field of 8,000.

Genlyte might not have a hand in the making of the particular fluorescent bulbs you buy. Three-quarters of its sales are commercial rather than residential. The real reason to consider the stock, though, is that the lighting industry as a whole is in — my apologies to physics enthusiasts for the pun — flux. Your fluorescent bulbs will last around five years (vs. a year for incandescent ones). The ones your buy after that might be better fluorescent bulbs, or they might be light-emitting diodes.

LEDs are the things that give your giant-number alarm clock its menacing red glare. They can also be made to give off heaps of soft white light just like traditional bulbs, or colors for interior decoration. LEDs last decades and can either focus light in a single direction or spread it around. They reach full brightness faster than fluorescent bulbs and don't get nearly as hot as incandescent ones. LED bulbs are already on the market, but they're too expensive and their efficiency is still just shy of that of fluorescent bulbs. But they'll be far cheaper and better in five years.

Genlyte has an early presence in LED lighting. It'll introduce its first line of general-purpose LED products at the Light Fair, a big trade show coming up in May in New York. Don't expect the products to be instant moneymakers. But Genlyte stands to profit nicely as companies gradually convert their lighting systems to new and better technologies. They'll pay top dollar for new lights because they'll end up saving money by doing so, just like you will with your new fluorescent bulbs. Also, some business will qualify for tax breaks for making the change thanks to the Energy Policy Act of 2005.

In August this column recommended shares of another lighting products company, Atlanta-based Acuity Brands (AYI). Its shares are up a quick 12%, vs. 7% for the broad market. Both Acuity and Genlyte are benefiting from a boom in nonresidential construction that started in earnest this year. Private spending on new buildings increased 8.7% in the first quarter and 11.7% in the second, according to the Bureau of Economic Analysis. Commercial building cycles tend to last five to six years, analysts say. Both companies have a bit of exposure to the shift to more efficient lightings in homes and deep exposure to the same shift in businesses.

Christopher Glynn, an analyst with CIBC World Markets, covers both stocks and favors Genlyte. He notes that the company's decentralized structure allows its brands to compete for ingenuity while benefiting from collective materials ordering and manufacturing. He also points out that Genlyte employs half of its sales force. Other lighting companies rely on independent agents for 80% to 90% of their sales. Independent agents usually work with two or three manufacturers, whereas company-employed agents, naturally, push only the company merchandise.

Acuity trades at 17 times forecasted 2006 earnings right now and is expected to grow its earnings at 15.5% a year over the next five years. Genlyte trades at 18 times earnings and is forecast to grow earnings at 18%. Those numbers make for PEG ratios (price/earnings ratio divided by earnings growth forecast) of 1.1 for Acuity and 1.0 for Genlyte. Both represent significant discounts to the broad market's PEG of about 1.5.