Acuity Brands: Putting Itself In The Spotlight
Contributor since 2011 / 26475 Followers
Summary:
- Acuity Brands has shown strong margin growth and prudent capital allocation, despite modest sales growth.
- The company’s core ABL segment has improved margins, while the smaller ISG segment is the main growth driver with doubled revenues in four years.
- The recent acquisition of QSC, LLC for $1.1 billion is expected to boost sales and EBITDA, making a forward earnings multiple of 17-18 times realistic.
- Despite a solid track record and potential earnings growth, I remain cautious due to past volatility and recent rapid share price increase.
EschCollection
Shares of Acuity Brands (NYSE:AYI) have seen healthy returns as of late as the market has grown more appreciative of the performance of the business. While total sales developments have not been that impressive, investors are pleased with margin growth following continued improvements in the business and sound capital allocation practices.
While I really applaud these advancements, I am mindful of the recent momentum displayed by the shares, as well as previous episodes, making me somewhat cautious here at current levels.
Intersection Of Sustainability & Technology
The paragraph header is essentially what Acuity is about. The company provides lighting and lighting controls products and solutions across two segments. This includes ABL, which stands for Acuity Brands Lighting & Lighting Controls, as well as ISG, which stands for Intelligent Spaces Group.
ABL is the core of the business, responsible for about $3.5 billion in sales in the fiscal year 2024. Frankly, past revenue trends have not been that impressive, yet the transformation within this segment made that segment margins have risen to the high-teens in recent years.
The ISG segment is much smaller with less than $300 million in sales, yet this business has doubled revenues in about four years time, while segment margins rose to the low-twenties. This is the real growth engine of the business, but a relatively small one.
The more distant past has been filled with many ups and downs. A $2 billion business in 2007 saw revenues fall after the economic crisis, as it took until 2013 to grow sales to this revenue base again. Revenues subsequently grew rapidly to $3.7 billion by 2017, but outside some volatility, sales have been trending flattish around these levels. Credits are due where they are due, as management has been able to buy back about 30% of the shares over the past decade, while it delivered on real margin gains as well.
About The Performance
On the first day of October, Acuity reported its fiscal 2024 results, a year in which revenues fell by 2.8% to $3.84 billion. Note however that momentum accelerated by the end of the year, with fourth quarter sales reported up 2.2% to $1.03 billion.
The company reported a 4% fall in revenues in the ABL segment to $3.57 billion, notably due to lower sales through the direct and independent sale network. ISG sales rose by a solid 15% to $292 million, now making up 7% and change of overall sales.
The improvements in the mix made that GAAP operating margins improved more than two points to 14% and change, resulting in a GAAP operating profits of $553 million. Non-GAAP margins came in about 2 points higher, with the difference split largely equally between amortization charges and stock-based compensation expenses.
Amidst a modest reduction in the share count to 31 million and some shares, the company grew adjusted earnings by 11% to $15.56 per share. Note that the balance sheet was in pristine shape, revealing a net cash position of around $350 million.
Trading at $317 per share, the company commands a $10.0 billion equity valuation, and $9.7 billion enterprise valuation. The unleveraged business trades around 20 times adjusted earnings, a reasonable valuation as it seems.
Putting Financial Strength To Work
Later in October, the company announced that it has reached an agreement to acquire QSC LLC. QSC describes itself as a leader in the adjacent markets for audio, video and control.
The company will acquire QSC in a $1.215 billion deal, which comes down to a $1.1 billion purchase price if the present value of tax benefits are considered. Based on this net price, the company is valued at 14 times EBITDA, suggesting a $78 million EBITDA contribution on a $535 million sales basis.
This suggests that EBITDA margins come in at 15%, trailing those of Acuity by about three points, reported around 18% of sales. The effective purchase price comes in at just over 2 times sales, and 14 times EBITDA. In comparison, this is largely in line with the own valuation of Acuity at around 2.4 times sales and nearly 14 times EBITDA.
Pro forma net debt is seen just north of $800 million, which is no concern at all as pro forma EBITDA is seen around three-quarters of a billion, for a leverage ratio around 1 times. With the business seeing about a 10-15% increase in sales and EBITDA on the back of the deal, accretion is expected, paving the way for earnings to advance further.
Concluding Remarks
Alongside the 2024 results, the company already indicated that 2025 sales were seen around $4.0 billion, plus or minus a hundred million. This would drive earnings up to levels in a range between $16.00 and $17.50 per share.
This is ahead of the deal with QSC, which will boost pro forma sales to around $4.5 billion, while some accretion to earnings per share is likely expected as well, making a $17-$18 earnings per share number look quite realistic. All this works down to about a 17–18 times forward earnings multiple.
All this looks quite realistic, as Acuity has built up a good track record in recent years, having transformed the business into a higher margin business, while it has been a continued buyer of its shares. While the forward multiple at 17–18 times looks realistic, reality is that shares have risen quite a bit, this being a $220 stock in August. This makes that earnings have risen some 40% in just about 4 months time here, as I am mindful of the momentum displayed by the shares.
Being mindful that Acuity has seen a huge boom-bust cycle around 2016, I am cautious. At the time, shares actually approached the $300 mark, followed by shares falling to the $100 mark in the years thereafter.
For now, I am keen to learn more about the interesting and substantial recent acquisition, yet I look forward to a pullback, or a period of stagnation before considering a neutral stance here, looking for a significant dip before getting onboard.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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