Recently at Singular Research, we initiated a Buy rating on LSI Industries, Inc. (LYTS), which focuses on high quality indoor and outdoor lighting products, as well as corporate visual image solutions with its products of screens and digital graphics. It also provides related professional services. We feel that the company has a strong LED business and has industry leading expertise with a loyal customer base. More importantly, it has the opportunity to become a "green" stock with products that deliver substantial energy savings to customers.
In 2011, LSI's sales of solid-state LED light fixtures grew 59 percent over the prior year, representing 20.7 percent of the company's total sales for the year. However, due to the absence of a large contract in 2012 that expired without the subsequent reduction of the cost structure to offset the revenue loss, we do anticipate earnings to decline this year. That said, full-year 2013 should show significantly higher earnings because of strong revenue growth and recent cost containment measures.
Considering these factors along with the conservative balance sheet, a $35 million unused bank line of credit, and an above average dividend yield, Singular views the company as undervalued and well positioned to attract investor attention.
Singular's equity analyst Thomas Kerr highlights a few potential catalysts for LSI's growth potential:
- LED lighting is becoming increasingly popular due to high efficiency and cost savings.
- Strong growth forecaste for LED lighting applications.
- LYTS offers an integrated visual solution package including lighting, graphics and signage products and services.
- LYTS has developed a focused and loyal customer base in the petroleum/convenience store market.
- Successful 7-Eleven project completed; capacity to take on additional large deployments.
- LYTS has been a consistent dividend payer with a current yield of about 3 percent to 4 percent.
- Acquisition opportunities have the potential to expand the company's customer base.
We believe that the continued growth in LED products, combined with realignment of lower costs in the graphics segment due to the absence of the 7-Eleven project, combined with stronger domestic economic growth will result in a return to normal earnings power in 2013. Kerr forecasts EPS for 2012 to be $0.19, with strong growth to $0.45 in FY:13. Therefore, Singular Research believes the stock is undervalued and have initiated coverage with a BUY rating and a price target of $11.00.
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