Description:
Osram is the second biggest light manufacturer in the world. It was formed as result of a spin-off from Siemens in 2013, thereby making the newly listed company the world’s largest pure play lighting company. Siemens will continue to maintain a stake of 19.5% in the company until further notice.
Osram is vertically integrated in the area of LED based lighting; it produces wafers and chips for electronic control systems, light management systems, and lighting solutions and services. Products range from traditional light systems (e.g. bulbs, halogen lights, low pressure discharge lamps, etc.), to LED based solutions, and infrared components which include emitters, detectors, sensors, and high performance semiconductor lasers. The company has engaged in a restructuring program with the aim of improving productivity ratios and making savings in other areas, which will help offset price erosion across the business.
The spin-off from Siemens has occurred at an optimal time for investors as it offers an ideal opportunity to participate in a once-in-a-lifetime industry event, namely the switching from incandescent light bulbs to LED lamps. This simple consumer act will generate substantial margin increases and revenue growth, while volumes remain static. The driver of this forecasted appreciation is the price difference between the two items. Obviously the margin and revenue increase is above average in the case of premium LED products, while lower quality products will compensate for a lack of margin increase with shorter product cycles.
While the traditional lighting market is set to decline, light use in the LED based market is expected to increase thanks to higher flexibility and better integration possibilities e.g. better decorative applications in both private and professional segments and locations. At present Osram generates about 25% of revenue from LED. In terms of regions, about 24% of overall sales stem from the Asian and African markets, 34% from North America and 41% from EMEA (Europe and Middle East). In the immediate future company management will be occupied with restructuring tasks; however from mid-2014 onwards, the company is expected to change focus, and it’s projected the business will grow by about 12% – 15% annually from 2015 onwards.
Given the low level of historic information available (i.e. company results) and the absence of a large range of companies active in the same business sector, it’s difficult to find and assemble a peer group for comparison purposes.
Strengths and weaknesses analysis / Fundamental analysis:
Strengths:
- Osram is supported by high innovation as well as new environmental regulations phasing out traditional light bulbs,
- Raw material prices have fallen since 2011. This should have a positive impact on net margins,
- EBIT margins are forecast to increase to about 9% and profitability to about 17% by 2015,
- Given its leading technology, the company is expected to outgrow the wider industry sector in the coming years,
- The lighting market is going through a rare technology transition and Osram is positioned as a key player.
Weaknesses:
- Organic growth (outside the LED impetus) is limited to 1.5%,
- Osram’s reported growth in the LED sector underperforms its principal competitor (Philips) by more than 20%,
- The 2012 reported figures show negative EBIT margins for the Lamps & Components (which includes LED) and Luminaries & Solutions divisions,
- A large portion of the company’s sales are subject to the speed of uptake of LED based lighting systems,
- The market is highly regulated, cyclical and dependent on consumer sentiment.