• 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.

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.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

If you like to see more ideas, please subscribe to the premium service “Value in Corporate Events” here and try the free trial. In this service we cover major earnings events, M&A, IPOs and other significant corporate events with actionable ideas. Furthermore, we provide coverage of situations and names on request!

The post Acuity Brands: Putting Itself In The Spotlight appeared first on Up2info.com.

• I reiterate my buy rating for Acuity Brands, Inc. due to expected near-term growth supported by strong data points and a solid balance sheet.
• AYI’s 4Q24 results showed revenue of $1.03 billion, driven by growth in ABL and ISG segments, with strong gross and adj EBIT margins.
• Favorable macroeconomic trends and rising demand for data centers are expected to drive AYI’s growth, supported by a robust cash position for strategic investments.

Investment summary

My previous investment thought on Acuity Brands, Inc. (NYSE:AYI) (published in July) was a buy rating, as I believed the slowdown in growth was temporary and that it should recover eventually as the macro conditions get better. I reiterate my buy rating for AYI as I expect growth to come online over the near term, which is supported by multiple data points. The business balance sheet is also in a very solid position that should enable it to capture any ramp up in growth opportunities.

Q4, 2024 results update

Released last week, AYI 4Q24 results included revenue of $1.03 billion, coming in line with consensus expectation for $1.024 billion. Revenue growth was driven by 1.1% y/y growth in the ABL segment and 17% y/y growth in the ISG, driving revenue to $955 million and ~$84 million, respectively. By sales channel, retail channel sales saw $43 million, down 8.6% y/y; independent sales network net sales saw $677 million (flattish growth vs. last year) and direct sales network net sales saw $110 million (also flattish growth vs. last year); corporate accounts channel net sales saw $66 million (up ~25% y/y); and OEM and other net sales saw $60 million (up 0.8% y/y). The strong gross margin performance of 47.3% led to a strong adj EBIT margin expansion of 120 bps y/y to 17.3%. Consequently, this led to an adj EPS growth of ~8% to $4.30.

Growth is coming back online

The stars are gradually aligning for AYI, which I expect to drive growth accelerating in the coming quarters. At the top, we have the US macro situation turning better as the Fed has cut rates, which should serve as a stimulus to increase construction projects (as the cost of funding comes down). The tight labor situation has shown signs of easing as job gains in the sector continued into September. Two major indicators of construction demand also moved in the right direction: (1) total construction spending inched further upwards to an all-time high post-covid, and (2) the dodge momentum index continues to stay at all-time high levels since 2006 (despite a slight recede in September).

All these favorable macro trends have translated into positive demand strength for AYI, wherein the ABL segment saw 1% y/y growth in the 4Q24. This is important because it tells us that orders/backlog are being translated into actual sales. Note that management noted order rates were outpacing shipments (in the 3Q24 earnings call); as such, my view is that this AYI will start to recognize more of this backlog, which is going to cause growth to accelerate.

Aside from the ABL segment, the strong demand for data centers is also translating into a growth driver for AYI, as evidenced by the 17% y/y growth in the ISG segment, which was driven by the Distech Controls segment that benefited from large data center projects. While this segment is a small part of AYI’s business (just 9% of FY24 adj EBIT), this could become a much larger growth driver as I don’t see the demand for data centers dying down anytime soon. In fact, my expectation is for the number of data centers to continue growing at a rapid rate. The reason is simple: the world is moving towards an AI era, and this necessitates a strong underlying AI infrastructure (computing power, storage capacity, low latency, more LLM training capacity, etc.). All of these translate into more data centers, and to give a sense of things, the top four hyperscalers are expected to spend $50 billion/quarter on digital infrastructure.

Solid balance sheet

Another thing to take away from this earnings result is the solid balance sheet. In the quarter, AYI improved its cash position to $846 million (~$150 million increase vs. last quarter). This strong balance sheet position should easily enable AYI to invest for growth when needed (in particular for the ISG segment that has a strong growth momentum going on) and execute on its pipeline of acquisition targets to juice growth. Moreover, it should also ease any concerns that investors may have regarding AYI’s ability to continue returning capital to shareholders. While AYI did not repurchase any shares in 4Q24, remember that they already repurchased 454,000 shares ($89 million worth) this year, and this is way ahead of management’s initial annual target of repurchasing $40 to $50 million worth of shares. Management also raised the quarterly dividend per share to $0.15 from $0.13 earlier in the year.

Valuation

Due to the positive developments since July, I have upgraded my growth expectations for FY25 to be in line with management’s guidance ($4 billion revenue at the midpoint). This growth target shouldn’t be difficult given the backlog, underlying demand trend, and the easy comp base in FY24. Growth ahead should normalize to mid-single-digits (same as my previous assumption that growth will recover back to industry level).

I did adjust my adj earnings expectation upwards given the strong performance in 4Q24. Using the midpoint of FY25 adj EPS guidance, I worked backwards (adj EPS * share outstanding) to derive ~$526 million of adj earnings. This implies an adj. earnings margin of 13.2%. Looking ahead, AYI is likely to invest more of its profits into growth; hence, I assumed margins to stay flat (I do note that this may be too conservative).

My assumption for valuation multiples remains the same at 18x forward PE, as there is no change to my medium-term growth assumption (mid-single-digits). 18x is also the historical average over the past 10 years, and hence, I don’t think there is a strong reason to believe valuation could go higher.

Risk

The timing of demand materializing (backlog turning into recognized revenue) could take longer than expected, especially if the labor situation worsens. Also, the uncertainty revolving around the US election may cause many developers to continue delaying their projects.

Conclusion

My view for AYI is still a buy rating, especially given the recent positive developments. The improving macroeconomic conditions, coupled with AYI’s strong balance sheet, create a favorable environment for AYI to capitalize on growth opportunities. While there are risks associated with the timing of sales recognition and macroeconomic uncertainties, I believe the overall growth outlook is encouraging.

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.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Acuity Brands: Growth Is Finally Coming Back Online appeared first on Up2info.com.

• Acuity Brands’ revenue continues to decline, but bottom line metrics like net income and EBITDA show improvement, driven by a strong net cash position.
• Despite better-than-expected earnings, the stock is down 2.3% while the S&P 500 is up 9.3%, and the firm offers limited upside potential at current valuations.
• The company is rewarding shareholders through dividends and significant stock buybacks, enhancing shareholder value.
• I maintain a ‘hold’ rating, but could upgrade if shares get cheaper or management provides strong guidance for the 2025 fiscal year.

In early April of this year, I reported on the management team at Acuity Brands (NYSE:AYI) announcing financial results covering the second quarter of the company’s 2024 fiscal year. In that article, I acknowledged that earnings came in better than anticipated. Unfortunately, this was offset by revenue figures that came in lower than what analysts had hoped they would. Ultimately, shares of the company barely budged in response. Since then, we have had additional data come out covering the third quarter of 2024. And while revenue continues to contract, most of the company’s bottom line results are encouraging.

In that article, I rated the business a ‘hold’. Even though I was happy about the bottom line performance, the price at which shares were trading made me believe that further upside relative to the broader market was unlikely. Sure enough, since then, the stock is down 2.3% at a time when the S&P 500 is up 9.3%. The firm continues to deliver on the bottom line, and this year will likely result in higher profits and cash flows than next year. But that’s not enough to offset its valuation.

Obviously, this picture could always change. The fact of the matter is that, before the market opens on October 1st, the management team at Acuity Brands is expected to announce financial results covering the final quarter of the company’s 2024 fiscal year. If results come in stronger than anticipated and/or if management reveals robust guidance for the 2025 fiscal year, my mindset could change. After all, shares are getting closer to the undervalued range. So it wouldn’t take much from where they are now for me to make that leap.

Continued mixed results and expectations

For those not familiar with Acuity Brands, the company specializes in lighting and light control products for its customers, with light solutions dedicated to commercial, architectural, and specialty customers. It also provides products and services like building management systems and location aware applications, all for creating what it calls ‘intelligent spaces’. I don’t know about you, but I consider this to be an interesting place for any company to play in. However, recent financial performance has unfortunately been mixed.

Take, as an example, the third quarter of the 2024 fiscal year. During that time, revenue for the company came in at $968.1 million. That’s a decrease of 3.2% compared to the $1 billion reported one year earlier. This decrease in sales was in spite of the fact that the company’s Intelligent Spaces Group reported a sales increase of 15% from $65.8 million to $75.7 million. This rise was mostly because of higher sales of Distech products and because of higher revenue thanks to its acquisition of KE2 Therm. The weakness for the company, then, came from its Acuity Brands Lighting and Lighting Controls segment. Revenue there dropped 4.5% year over year, declining from $940.7 million to $898.5 million. That decline was because of weakness across all sales channels, with the exception of corporate accounts.

Even though revenue has disappointed, the bottom line for the company did improve. Unlike in the third quarter of 2023 when the company had net interest expense of $3.9 million, it booked net interest income this year of $1.8 million. This is because the firm has a net cash position as of this writing of $203 million. This allowed net income to grow from $105 million last year to $113.9 million this year. Other profitability metrics largely followed suit. The one exception was operating cash flow. It declined from $165.1 million last year to $152.5 million this year. But once we adjust for changes in working capital, we get an increase from $137.3 million to $148.6 million. Meanwhile, EBITDA for the company managed to rise from $175.6 million to $180 million. Management does also keep track of what it calls adjusted net income. This grew nicely from $120.1 million in the third quarter of 2023 to $130.7 million the same time this year.

In the chart above, you can see financial results covering the first nine months of 2024 compared to the first nine months of 2023. As was the case with the third quarter on its own, the company saw revenue drop year over year. However, net profits, adjusted net profits, adjusted operating cash flow, and EBITDA all increased on a year-over-year basis. Only operating cash flow took a hit, declining from $471.5 million to $445.1 million. There were two primary drivers of this year-over-year improvement on the bottom line. In the first nine months of last year, the company saw special charges of $6.9 million. No similar charge was incurred this year. Furthermore, last year, the company booked $16.2 million in net interest expense. This year, because of higher interest rates and a change to a net cash position, the company saw net interest income of $1 million.

Management is making sure to allocate this capital toward rewarding shareholders directly. During the first nine months of this year, the company paid $13.4 million to shareholders in the form of dividends. That’s up from the $12.7 million reported the same time last year. But more importantly, the company has also been buying back stock. In the first nine months of this year, the business repurchased 0.5 million shares in exchange for $88.3 million. And for the first nine months of this year as a whole, it repurchased 1.3 million shares for $218.8 million.

When it comes to the final quarter of this year, analysts believe that revenue will come in at about $1.01 billion. This would actually match with the company achieved in the final quarter of 2023. Earnings per share, meanwhile, are forecasted to be at about $3.70. That would be drastically above the $2.63 reported the same time last year. This would bring net profits up from $82.9 million last year to $116.5 million this year. There are also estimates when it comes to adjusted earnings per share. Those are anticipated to be around $4.19, which would translate to net profits on an adjusted basis of $131.9 million. For context, last year, adjusted earnings per share totaled $3.97. That works out to roughly $125.4 million in adjusted net income.

Unfortunately, analysts have not provided guidance when it comes to other profitability metrics. Having said that, if earnings are going to come in higher than what they did last year, it is highly likely that other profitability metrics for the company will also improve year over year. In the table above, you can see what the important ones were for the final quarter of 2023. I dare not guess what those numbers will ultimately come out to be. But I am cautiously optimistic about the picture.

For 2024 as a whole, if we take analysts’ estimates for earnings per share, then we should get net profits of about $420.2 million. Simply annualizing the results that we have seen for the first nine months of the year, we would then get adjusted operating cash flow of $497.1 million and EBITDA of $712.3 million. Using these estimates, as well as historical results for the 2023 fiscal year, we can see in the chart above how shares are currently priced. On a forward basis, they are definitely inching closer to being attractive. However, I would still say that they are not attractive enough. As part of my analysis, I then, in the table below, compared Acuity Brands to five similar firms. And using each of the three valuation metrics, I found that two of the five companies ended up being cheaper than our target. This further impresses upon me that the stock is probably closer to fair value than it is being undervalued.

Click to enlarge

Takeaway

Fundamentally speaking, I understand that the picture for Acuity Brands is mixed at this time. But all things considered, I must say that I am a fan. I’m not a big enough fan to upgrade it from a ‘hold’ to a ‘buy’. But I do think that the company is moving in the right direction. I love its net cash position and I especially enjoy the improvements the company has seen from a profit and cash flow perspective. If shares continue to get cheaper and/or management comes out with robust expectations for the 2025 fiscal year, that could be enough for me to change my mind. But for now, staying the course makes the most sense.

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.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Crude Value Insights offers you an investing service and community focused on oil and natural gas. We focus on cash flow and the companies that generate it, leading to value and growth prospects with real potential.

Subscribers get to use a 50+ stock model account, in-depth cash flow analyses of E&P firms, and live chat discussion of the sector.

Sign up today for your two-week free trial and get a new lease on oil & gas!

The post Acuity Brands: Inching Closer To An Upgrade As Earnings Near appeared first on Up2info.com.

• Acuity Brands, Inc. is expected to grow revenue due to a healthy backlog, expansion into new verticals, and product innovation.
• Margins to benefit from operating leverage, product vitality, and margin-accretive acquisitions, with full integration of Optotronics business contributing.
• The company’s revenue and margin growth prospects are positive, but the current valuation is in line with historical averages, leading to a neutral rating.

Investment Thesis

Acuity Brands, Inc. (NYSE:AYI) should deliver good revenue growth in the coming quarters thanks to its healthy backlog and improved order pipeline in the infrastructure business. Further, the company’s revenue growth should benefit from its expansion into new verticals like refueling stations and horticulture. In addition, the company’s focus on product vitality and innovation should contribute to volume growth and improve pricing/mix.

On the margin front, the company’s margins should benefit from operating leverage on higher sales, product vitality initiatives, and margin-accretive acquisitions. Further, the full integration of the Optotronics business should also contribute to margin growth. While I like the company’s growth prospects, I can’t say the same for its valuation. The stock has seen a ~50% increase since my previous bullish article and is trading in line with its historical averages on consensus FY25 P/E. I believe the company’s growth prospects are already reflected in the stock. So, I am moving to the sidelines and rating AYI neutral.

Revenue Analysis and Outlook

Over the last few quarters, the company has been seeing downbeat revenue trends due to macroeconomic headwinds and challenges from difficult Y/Y comparisons in its Acuity Brands Lighting and Lighting Controls (ABL) segment.

In the third quarter of 2024, the ABL segment also faced some labor shortage-related issues that impacted the company’s ability to meet production targets. As a result, the segment saw a Y/Y decline in sales across its independent sales network, direct sales network, retail sales, and OEM and other channels. This decline more than offset sales growth in its corporate accounts, which benefitted from a large retail relight project and much easier comparisons as it lapped last year’s 24.9% decline.

On the other hand, the Intelligent Spaces Group (ISG) segment’s sales grew by 15% Y/Y driven by higher sales of Distech products and contribution from the acquisition of KE2 Therm.

On a consolidated basis, the company’s net sales declined by 3.2% Y/Y to $968.1 million as sales decline in the ABL segment more than offset higher sales in the ISG segment.

Looking forward, I am optimistic about the company’s revenue growth outlook.

On its last earnings call, management noted that the company’s order rates consistently exceeded shipments last quarter, resulting in a healthy backlog growth. Further, the company also noted increased quoting activity, particularly in the infrastructure sector, which indicates a healthy order pipeline. This backlog growth and improved order pipeline should translate into good sales growth in the coming quarters as management addresses labor shortages and related production issues.

The company is also expanding into new verticals such as refueling stations and horticulture, where there is a good demand for sustainable and efficient lighting solutions. Further, the company continues to expand its solutions from Intelligent Spaces business across geographies. Last quarter, the company continued to add system integrator capability in the UK, Australia, and Asia as a part of geographic expansion.

In my last article, I mentioned Acuity’s focus on product vitality and innovation to be a key revenue driver in the medium to long run. The company has continued to introduce new and improved products such as Lithonia FRAME and advanced lighting solutions from A-Light, Luminis, and Eureka. The company’s acquisition of Optotronics a few years ago also has given it more control of technology in its luminaries and provided significant flexibility both in design and operations, driving innovation. In addition to helping volumes, the company’s focus on innovation should also help the company in terms of pricing/mix.

Margin Analysis and Outlook

In Q3 2024, despite a 3.2% Y/Y net sales decline, the company saw a 200 bps Y/Y increase in gross margin to 46.7% and a 100 bps Y/Y increase in adjusted operating margin to 17.3%. This increase was attributed to product vitality initiatives, effective price/cost management, and productivity gains, which more than offset the impact of lower net sales and higher production costs.

On a segment basis, the ABL and ISG segments grew adjusted operating margin by 100 bps Y/Y and 340 bps Y/Y, respectively.

Looking forward, I am optimistic about the company’s margin improvement prospects. The company’s revenue outlook is positive and the company’s margins should benefit from operating leverage due to increasing sales. The company’s margins should also benefit from the product vitality initiatives, as the new/improved products usually command better pricing and margins. Further, the company has fully integrated the Optotronics business acquired a few years back, which should enable it to have more flexibility both in design and operation. This vertical integration should also improve margins.

The company has also been implementing a bolt-on acquisition strategy and acquiring a high-margin business (KE2 Therm is a good example). I expect management to continue implementing this strategy, which should help improve the margin mix in the long run.

Valuation and Rating

AYI stock is trading at 15.41x FY24 consensus EPS estimate of $15.52 and 14.54x FY25 EPS estimate of $16.45. Over the last 5 years, the stock has traded at an average forward P/E of 14.47x.

While the company’s FY24 P/E is at a premium to its historical valuations, its FY25 P/E is almost in line.

Many of the electrical components and equipment companies like Eaton (ETN) and Hubbell (HUBB) are trading at a premium to their historical valuations these days. One reason behind this premium is they supply components related to data centers or grid resiliency, and their end-market demand is benefiting from secular megatrends. However, Acuity Brands is primarily into lighting products and is not as exposed to some of those secular themes. So, I don’t think its P/E multiple can re-rate meaningfully above historical levels.

Further, the company imports ~15% of its finished products and some of the raw components to manufacture its products from Asia. With elections approaching, there is a good chance of debate around import tariffs re-igniting, which might keep some pressure on AYI’s valuation multiple. This is another reason why I don’t see much probability of P/E multiple re-rating from these levels.

With the company’s EPS expected to grow around 6-7% over the next couple of years (consensus estimates), I believe the stock can give mid-single-digit CAGR assuming P/E remains constant. This is not enough for me to give a buy rating. Last year, when I covered the stock with a buy rating, it was trading at a meaningful discount to its historical levels. However, the stock has given over 50% upside since then. After this meaningful price appreciation, I believe that the current valuations appropriately reflect the company’s prospects. Hence, I am downgrading my rating to neutral.

Takeaway

I am optimistic about the company’s revenue and margin growth prospects in the coming quarters. The revenue growth should benefit from a healthy backlog, improved order pipeline, expansion into new verticals, geographic expansion in the ISG segment, and product vitality initiatives. The margins should see gains from operating leverage, product vitality initiatives, accretive M&As, and full integration of Optotronics business. While I like the company’s growth prospects, I am not a fan of its current valuation, which is trading in line with its historical averages. So, I am moving to the sidelines and downgrading my rating to neutral.

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.

This article is written by Gayatri S.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Acuity Brands: Good Prospects, But Moving To The Sidelines On Valuations appeared first on Up2info.com.

• Temporary growth slowdown is due to labor shortages and tough y/y comps.
• AYI’s healthy backlog and macro data suggest demand remains healthy.
• Despite negative growth, AYI continues to show solid margin improvements.

Investment summary

My recommendation for Acuity Brands, Inc. (NYSE:AYI) is a buy rating. I don’t believe the recent negative growth is due to any structural reasons. Based on what I am seeing, the underlying non-residential construction demand remains robust, and the key constraint to growth is the tight labor market, which should go away as the macro environment eventually recovers. Importantly, AYI continues to see a healthy backlog, which I take as a leading growth indicator. Also, AYI has managed to lower its cost structure, providing more room for margin expansion when growth recovers.

Business Overview

AYI sells indoor and outdoor lighting and control systems. Of the two, lighting is its main business under Acuity Brands Lighting [ABL], which represents 94% of LTM revenue, and AYI focuses mostly on non-residential construction. The other segment is the Intelligent Spaces Group [ISG], which sells building management systems-related solutions. Geography-wise, the majority of revenue is from the US (86% as of FY23).

3Q24 results update

Released last week, AYI reported 3Q24 net sales of $968 million, below consensus estimates of $997 million. Breaking down sales by channel: (1) retail channel saw 4.8% decline to $46 million; independent sales network saw 7.1% decline to $637 million; (3) direct sales network saw decline of 6.6% to $97 million; (4) corporate accounts went up 36.3% to $61 million; and (5) OEM and other saw flattish growth, coming in at $58.2 million. Consolidated gross continues to expand (up 200bps in 3Q24), coming in at 46.7%. This drove the increase in adj. EBIT margin as well, coming in at 17.3% (up 100 vs 3Q23). As a result, adj. EPS grew by ~11% to $4.15.

Growth slowdown is a short-term issue

The market continues to be negative on AYI’s core business growth performance, which has continued to stay (1Q24: -7%; 2Q24: -5%; 3Q24: -4%), as seen from the pressure that AYI’s share price is seeing. While the headline numbers don’t look good, I think the market is overlooking the fact that this growth slowdown is a temporary one. There were two main reasons: (1) the tough y/y comp saw in 1H23; (2) a tight labor situation. For the former, AYI is going to see easier comps in 4Q24 and the next few quarters, so this headwind will turn into a tailwind. The latter is the problem of pressuring growth. The tight labor market has been a persistent problem in the US construction industry, and this has negatively impacted AYI’s ability to ramp production quickly enough to meet demand.

As such, the reasons for growth slowing down are idiosyncratic and not structural. In reality, the non-residential construction market in the US has been robust. According to the US Census Bureau, non-residential construction spending has continued to show positive growth this year, and the strength is across the board except for office and commercial (which I believe is due to the work-from-home culture dampening demand for these buildings).

What investors should also note is that growth is delayed and not a loss for AYI. While they failed to meet production targets, it doesn’t mean that AYI is not growing. The AYI order rate and backlog continue to be healthy. Management noted that order rates continue to grow, outpacing shipments, which bodes well for the backlog heading into 4Q24. In addition, lighting tends to be one of the last few parts that go into a building, so there is a lag between the robust demand we see today and actual orders flowing into AYI. Lastly, AYI continues to demonstrate a positive price/mix growth contribution, which shows the industry and AYI itself are not really seeing any pressure in terms of oversupply, weak demand, or anything like that.

Margins continue to improve

Despite the negative growth performance, AYI continues to show solid margin improvements. The ABL segment expanded adj EBIT margin by 100bps vs 3Q23, driven largely by 180bps gross margin expansion. This shows that AYI execution on its initiatives (improve productivity, service quality, and technology) is working well, and it also means that AYI has a structurally lower cost base today. Which means, when growth recovers, AYI should be able to drive margins to new heights. To put things into perspective, the ABL segment generated $898.5 million in revenue in 3Q24, and the 18% adj EBIT margin vs. 3Q22 generated $1 billion in revenue (12% higher), but only saw a 15.8% adj EBIT margin.

Valuation

I model AYI using a forward PE approach, and using my assumptions, I believe AYI is worth ~$298. I believe a growth recovery back to industry level (mid-single-digits), at the minimum, is possible over the next few years as the macro environment gets better (labor situation gets better and rates come down, which will ease the cost of funding burden for developers). For FY24, I assumed sales to come in as guided (guided for $3.85 billion, which, I think, is a credible guide given 3 quarters of the year results are already out and management has 1 month of 4Q24 data). As for FY25 and FY26, I modeled a gradual recovery at 5%. However, I do expect margins to grow higher than 11.4%, as 3Q24 is already at 13.5%. Using the recent trend of ~30 bps of expansion per year, I extrapolated it over the next 3 years. When things get normalized, I expect AYI to trade back to its historical multiple of 18x.

Risk

AYI could see a further slowdown in growth if the labor situation gets worse, forcing them to miss more production targets. Given that this appears to be the focus of the market, share prices should see further pressure. Margin expansion could be a lot more muted in the near term than I expected if management decided to step up growth reinvestments (i.e., invest more in technology and other productivity initiatives). While this is likely good for the long term, muted margin expansion coupled with further negative growth will put more pressure on the stock.

Conclusion

My view for AYI is a buy rating. The underlying demand in the non-residential construction market remains healthy, and the weak growth performance so far is temporary (due to labor shortages and tough y/y comps). Importantly, AYI’s backlog remains healthy, and it has managed to lower its cost structure, leaving more room for margin expansion when growth recovers. Once AYI starts to show normalized growth, multiples should re-rate upwards to 18x.

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.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Acuity Brands: Growth Should Recover In The Coming Quarters appeared first on Up2info.com.

• Acuity Brands has a scalable business model and is targeting a double-digit growing market.
• Recent acquisitions indicate potential inorganic growth for AYI.
• The incorporation of artificial intelligence capabilities could lead to improved lighting experiences and performance.

Acuity Brands, Inc. (NYSE:AYI) presents a scalable business model, and targets a market growing at a double-digit. Recent acquisition of assets acquired from Current Lighting Solutions, LLC, and the acquisition of KE2 Therm Solutions indicate that AYI may also be growing inorganically in the coming years. Besides, if the company offers further information about how artificial intelligence capabilities could offer better lighting experiences and improve performance, I believe that many new analysts may study the business model. There are some risks from rapid technological changes or failed internationalization efforts; however, the company looks cheap right now.

Acuity Brands

Acuity Brands is an industrial and technological company with a presence in regional markets. The company has 18 production facilities, with six of them located within the United States, seven in Mexico, three in Canada, and two in European territory. The infrastructure is completed with third-party contracts and various forms of outsourcing, especially with regard to the logistics of distribution and entry of raw materials.

On this point, it is good to highlight that particularly in Mexico, the company has managed to have some of its production facilities declared as Maquiladoras, allowing the entry of raw materials without paying taxes and with tax benefits. This means that the bulk of the company’s manufacturing is currently in this country as a result of the industry installation policies that the Mexican government established, mainly for the North American economy.

There are two segments that the company uses to organize its activities: the lighting controls segment and the intelligent spaces segment. Both segments offer services or products related to luminaires, either for the application of individuals or for the organization of spaces and events.

The luminaire controls segment includes luminaire solutions for residential, commercial, and architectural purposes, along with luminaire control systems and components that are combinable for system management. Most of these products are based on low-consumption LED technology. Among some of the brands that stand out, we can name eldoLED, Eureka, Gotham, and Healthcare Lighting. I believe that the most interesting thing about this business model is the fact that it is described as predictable and scalable. It was noted in a recent presentation given to investors. Under my best-case scenario, I assumed that management was correct about the scalability of the business model.

Investment analysts out there will most likely appreciate that future FCFs may be quite predictable. In the last presentation, the company noted an increase in quarterly adjusted operating profit of close to 2% y/y.

Customers in this segment are electronic product installers and distributors, original manufacturers, retail distributors, and home improvement centers, to name a few. Customers in this segment are entirely concentrated in the United States, and in some cases, these customers move products through the international market.

On the other hand, the smart spaces segment is aimed at the design and installation of lighting spaces, as well as the development of software for their control and adjustment. These control software is not limited only to lighting capabilities, but also covers ventilation systems and other associated residential facilities.

Clients are varied, and go beyond system integrators. They also reach airports, retail stores, and commerce in general that need to develop the lighting capabilities of their interiors. Clients are also located within the United States, although in this case, the service also extends to a lesser extent towards international presence. Net sales obtained from this business segment are not large. However, ISG net sales offer double-digit net sales growth and an adjusted operating profit margin of close to 32%. In my financial model, I mainly had a look at the luminaire controls segment business because it is the largest business segment.

Recent Earnings Increase, And EPS Revisions Increased

Recent EPS GAAP was better than expected, however the most interesting is the fact that seven different analysts increased their expectations in the last 90 days. Given this level of optimism out there, I believe that we may see demand for the stock in the coming years.

The recent outlook given for the year 2024 includes net sales close to $3.7-$4 billion and adjusted Diluted EPS close to $14.75-$15.5 per share. With the outlook given for the year 2024 and expectations about 2024 delivered by other analysts, I believe that we could see stock price improvement in the coming quarters.

Given the previous earnings history, in my view, it is likely that Acuity Brands reports better than expected EPS. In this regard, take a look at the table below.

Balance Sheet: $578 Million In Cash To Buy Its Own Shares, Or Buy New Targets

As of February 29, 2024, the company reported $578 million in cash, with total current assets of $1.54 billion and total assets worth $3.52 billion. The current ratio is larger than 2x, so I believe that there is sufficient liquidity to run further operations. The asset/liability ratio is also larger than 2x, so I believe that the balance sheet appears quite stable.

I appreciate quite a bit that long-term debt does not seem significant. With $322 million in accounts payable, I believe that providers are financing the business model of Acuity Brands. The long-term debt stands at $495 million.

Assumption 1 About Inorganic Growth: May Accelerate Future Net Sales Growth

The company’s growth strategy is based on a hybrid model based on the organic scale of its sales along with the possibility of strategic acquisitions to expand productive margins. I believe that the international expansion of services is one of the objectives, which may bring significant organic growth. In this regard, the company’s expansion in Mexico and the manufacturing facilities in this country may bring significant net sales growth in the coming years.

There are several acquisitions that may bring significant net sales growth in the coming years. The assets acquired from Current Lighting Solutions, LLC, and KE2 Therm Solutions, Inc. may bring technological know-how, new customers, and efficiency efforts.

On January 19, 2024, we acquired certain assets related to Arize® horticulture lighting products from Current Lighting Solutions, LLC. Source: 10-Q

On May 15, 2023, using cash on hand, we acquired all of the equity interests of KE2 Therm Solutions, Inc.. KE2 Therm develops and provides intelligent refrigeration control solutions that deliver the precision of digital controls to promote safety, efficiency, and reliability, while delivering cost savings to the customer. Source: 10-Q

In my view, if the business model is scalable, new acquisitions will most likely enhance EPS generation, and enhance FCF margin growth. In this regard, it is worth noting that, in the past, revenue, goodwill, EBITDA margin, and FCF margin grew together.

Under my best-case scenario, I assumed that new acquisitions may be reported. Given the total amount of cash in hand seen in the balance sheet, I do think that Acuity Brands could execute new acquisitions. The company reported $578 million in cash.

Assumption 2: The Lighting Market May Accelerate Acuity’s Total Net Sales Growth

I believe that the Lighting Control System market growth could enhance Acuity’s net sales growth. There are experts out there expecting net sales growth close to 16.8% from 2023 to 2032. Under my best-case scenario, I included median net sales growth of close to 7%-8%, which, I believe, is a conservative figure. Given the growth of the market, I think that net sales growth close to 7%-8% is realistic.

The Lighting Control System Market Size was valued at USD 33.2 Billion in 2022 and is projected to reach USD 154.7 Billion by 2032, demonstrating a Compound Annual Growth Rate of 16.8% from 2023 to 2032. Source: Ameco

Assumption 3: Repurchase Of Shares Could Lower The WACC

Acuity Brands is acquiring a significant number of shares at the current point in time. In my view, it means that the Board of Directors may think that the stock is not expensive. I believe that further acquisition of shares may lower the cost of capital, and may bring other investors to acquire shares. In the best-case scenario, I assumed that the repurchase of shares could lead the WACC to be close to 9%. The company reported $578 million in cash, which AYI could use to repurchase shares.

During the first six months of fiscal 2024, we repurchased 0.4 million shares of our outstanding common stock for $67.6 million. We expect to repurchase shares on an opportunistic basis subject to various factors including stock price, Company performance, market conditions, and other possible uses of cash. Source: 10-Q

Assumption 4: Artificial Intelligence May Improve Certain Product Offerings, And Enhance Net Sales Growth

In the last 10-k, the company noted that certain products recently incorporated artificial intelligence capabilities, which I believe could bring significant improvements in terms of efficiency. As a result, the company may receive further demand for their products, which may bring further net sales growth. Under my best-case scenario, I also assumed that further AI capabilities may enhance the margin obtained by Acuity Brands. Hence, the operating margin may accelerate.

We have begun incorporating artificial intelligence capabilities into certain product offerings. These features may become important in our operations over time. Our competitors or other third parties may incorporate AI into their products more quickly or more successfully than us, which could impair our ability to compete effectively and adversely affect our results of operations. Source: 10-k

My Best-Case Scenario Implied A Valuation Of $390 Per Share

Under my best-case scenario, my assumptions are correct. I expect 2034 total revenue to be close to $5.259 million, presenting 2034 revenue growth of 7.95%, and having a median revenue growth of around 7.95%. With the cost of products sold close to $2.392 million, I expect 2034 gross profit of $2.867 million.

In addition, subtracting 2034 operating expenses, among which we have the selling, distribution, and administrative expenses of $1,475 million, accompanied by the special charges close to $129 million, gives us total expenses close to $1,604 million, leaving the operating income close to $1,262 million along with 2034 operating margin worth 24%. Also, with interest expenses of about $1 million and 2034 income tax expense of $103 million, I obtained 2034 net income of $1.148 million, with a profit margin of 21.83%.

I foresee a payout of 4.50%, which is close to the payout reported by Acuity Brands, which implies 2034 dividend payment of $51.670 million, resulting in the NPV of dividend payment of $208 million.

Also, with a WACC of 8% and taking into account PE ratio of 24x, the NPV of the terminal value would be close to $11 billion, closing with a total valuation of $12 billion, which would imply a fair price of $390 per share. Note that the sector median PE TTM GAAP is close to 24x, so I am not really thinking out of the box here.

Bearish Case Expectations

Under this case scenario, some of my assumptions are not correct. In a less encouraging case, the total revenue will be $5055 million, and 2034 revenue growth could be close to 5.98%, with a median revenue growth of 5.98%. To generate these profits, the company would have the cost of products sold close to $2392 million, which leaves us with a gross profit of $2663 million.

I also foresee that the operating expenses will have selling, distribution, and administrative expenses of $1475 million, with the special charges of $129 million, thus giving us total expenses of no less than $1604 million, ending in the operating income of $1058 million and the operating margin being 20.93%.

Additionally, we have other expenses, which will consist of the interest expense, net of $1 million, added to the miscellaneous expenses very close to $9.9 million and the income tax expense worth $103 million. Under this case scenario, I estimated that the net income would be $944 million, accompanied by a profit margin close to 18.68%.

I expect the payout to be close to 4.5%, having an approximate 2034 dividend payment of $42.48 million, giving the NPV of dividend payment of about $159 million.

Note that I assumed a WACC of 9% and an exit PE ratio of 18x, resulting in the terminal value of $16993 million. The NPV of terminal value is calculated to be around $6585 million, resulting in the total valuation of $6744 million and a fair price of $219 per share.

Competitors, And Risks

The domestic lighting markets are highly competitive. In addition to traditional businesses within this industry, in my view, it must be taken into account that the increase in artificial intelligence and automation technology is transforming this landscape due to the emergence of software that competes with Acuity as well as specific service providers within this market.

Without a doubt, the company’s ability to adapt to technological development in the industry and competitive market conditions play a fundamental role in its growth and operating margins. In any case, according to my analysis, the greatest risk that the company currently experiences in the short term is the regulatory situation in Mexican territory, since if the tax benefits that have been granted to it cease, it will have to orient its productive model in another sense, today largely concentrated in this country.

On the other hand, the company’s recent investments in artificial intelligence tools may not give the expected results. In addition, a part of its services is supported by the capabilities of third parties, generating latent risks in the event of the termination of contracts or complications in this sense.

Conclusion

Acuity Brands recently delivered better than expected EPS and beneficial 2024 outlook. Moreover, many analysts increased their EPS expectations in the last 90 days. Considering the expected growth of the lighting control market, recent acquisition assets acquired from Current Lighting Solutions, LLC, and the acquisition of KE2 Therm Solutions, I believe that we could expect significant net sales growth in the coming years. In addition, the recent mention of artificial intelligence capabilities in the last annual report could bring new efficiency and demand for the products. I do see risks from failed international expansion, changes in regulations in new or existing jurisdictions, or emerging alternative technologies. With that, I do believe that Acuity Brands trades quite undervalued at this point in time.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of AYI either through stock ownership, options, or other derivatives. 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.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Acuity Brands: Scalable Business Attracts Analysts, Thanks To AI And Growth appeared first on Up2info.com.

• Acuity Brands, Inc. announced financial results for Q2 of fiscal year 2024, with revenue declining but profitability improving.
• Revenue fell by 4% due to weakness in the Acuity Brands Lighting and Lighting Controls segment, but the Intelligent Spaces Group segment saw a 17% increase in sales.
• Earnings per share exceeded expectations, with improvements in cost of products sold and selling, distribution, and administrative costs contributing to higher profitability.
• Even so, Acuity Brands shares look more or less fairly valued, especially after how much they have risen since I last wrote about them.

On April 3rd, the management team at Acuity Brands, Inc. (NYSE:AYI), a company that focuses on producing and selling lighting solutions like commercial and architectural lighting, as well as a variety of other offerings such as building management systems and location-aware applications, announced financial results covering the second quarter of its 2024 fiscal year. Those who follow my work closely might know that I’m not the most enthusiastic person about the enterprise. But if you look at my past regarding the business, you would know that my calls have also been wrong. In March of 2022, I wrote an article about Acuity Brands wherein I rated it a “hold.” This was based on some growth-related struggles the company saw, even prior to the pandemic. Its balance sheet and cash flows were impressive, but the stock looked more or less fairly valued.

Unfortunately, that call ended up being overly pessimistic. While growth continues to be a problem, with revenue actually declining year over year, management has improved profitability rather significantly. This has led to shares roaring higher, with the stock generating a return for investors since my last article about the business totaling 40.6%. That dwarfs the 19.6% rise seen by the S&P 500 (SP500) over the same window of time. The performance that has pushed the stock up so much more than what the market has seen has mostly continued through the second quarter of the 2024 fiscal year. While the business did fall short of expectations when it came to revenue, it exceeded forecasts when it came to profits per share. Even so, given how the stock is still priced, I cannot imagine this outperformance continuing. Because of that, and in spite of being off on my call so far, I’ve decided to keep the business rated a ‘hold’ for now.

A mixed quarter

As I mentioned already, April 3rd was met with some interesting news from the management team at Acuity Brands. Management reported mixed financial results that were largely greeted warmly. Take revenue as an example. Sales during the second quarter of the 2024 fiscal year totaled $905.9 million. That represents a decline of 4% compared to the $943.6 million generated one year earlier. It’s also $2.1 million short of what analysts were anticipating.

According to management, this was driven by weakness in the ABL (Acuity Brands Lighting and Lighting Controls) segment. Revenue for that unit dropped 5.3%, plunging from $890.8 million to $843.5 million. Management claimed that all sales channels were negatively impacted for this unit. But it appears to be because the second quarter of the 2023 fiscal year resulted in higher-than-expected revenue because the company was working through backlog. Fortunately for investors, not every segment for the company was negatively impacted. The smaller segment, known as the ISG (Intelligent Spaces Group) segment, reported a 17% increase in revenue, with sales shooting up from $58.2 million to $68.1 million. An acquisition, combined with higher volume that was driven by demand, was responsible for this increase in sales.

With revenue falling, you might think that profits would have taken a beating. But the opposite is true. Earnings per share for the quarter came in at $2.84. This was $0.14 per share higher than what analysts had forecasted. It comfortably exceeded the $2.57 per share reported the same time one year earlier. There were multiple contributors behind this improvement that took net profits from $83.2 million to $89.2 million. But the most significant, by far, ended up being two particular metrics. The firm’s cost of products sold declined from $536.9 million last year to $493.5 million this year. And the companies selling, distribution, and administrative costs dipped from $295.2 million to $294.3 million. Improvements when it came to material and import costs were largely responsible for the decline in the company’s cost of goods sold. Other profitability metrics followed a similar trajectory.

The one exception to this was operating cash flow. It dropped from $118.8 million in the second quarter of 2023 to $102.6 million the same time this year. But if we adjust for changes in working capital, we get an increase from $116.5 million to $124 million. Meanwhile, EBITDA for the business managed to grow from $144.8 million to $153 million.

As you can see in the chart above, the result seen during the second quarter of 2024 ended up being very similar, relative to the second quarter one year earlier, as what we saw for the first half of the 2024 fiscal year relative to the first half of 2023. Revenue fell, as did operating cash flow. However, net income, adjusted operating cash flow, and EBITDA all improved on a year over year basis. Unfortunately, we don’t really know what to expect when it comes to the 2024 fiscal year in its entirety.

But if we assume that the first half of the year is indicative of how the second-half will perform, we can get some reasonable estimates. Net profits, for instance, should come in at around $415.4 million. That would be up nicely from the $346 million reported for 2023. Adjusted operating cash flow of $493.4 million would beat out the $465.4 million generated in 2023. And EBITDA totaling around $696.2 million would exceed the $648.5 million the company generated last year.

Taking these numbers, it becomes simple to value the firm. In the chart above, I did just that, using both historical results for 2023 and estimates for 2024. The stock does look a bit cheaper on a forward basis. This is especially true when it comes to the EV to EBITDA approach. But that’s because the firm has negative net debt in the amount of $83 million.

I wouldn’t exactly call this a value prospect. But it’s certainly not overpriced either. Relative to similar firms, I would actually argue that the stock is more or less fairly valued.

This can be seen in the table below. In that table, I compared Acuity Brands to five similar firms. When it came to both the price to earnings approach and the price to operating cash flow approach, I found that three of the five were cheaper than our candidate. This number drops to two of the five when using the EV to EBITDA approach.

Click to enlarge

Takeaway

Fundamentally speaking, I’m not the biggest fan of Acuity Brands, Inc. I don’t like seeing revenue drop year after year. Although I didn’t show it, revenue did decline from 2022 to 2023 as well.

It is nice to see profits and cash flows rise. However, Acuity Brands, Inc. stock is not cheap enough to warrant any meaningful degree of optimism. Instead, I think that keeping the business rated a “hold” would still be logical at this time.

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.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Crude Value Insights is an exclusive community of investors who have a taste for oil and natural gas firms. Our main interest is on cash flow and the value and growth prospects that generate the strongest potential for investors. You get access to a 50+ stock model account, in-depth cash flow analyses of E&P firms, and a Live Chat where members can share their knowledge and experiences with one another. Sign up now and your first two weeks are free!

The post Acuity Brands Barely Budges On Better-Than-Expected Earnings appeared first on Up2info.com.

• Acuity Brands reported its Q1 earnings which beat expectations.
• Despite a decline in sales, pricing initiatives have supported expanding margins.
• AYI benefits from solid fundamentals, although we believe the recent rally has already captured many of the positives in the outlook.

Acuity Brands, Inc.’s (NYSE:AYI) latest quarterly earnings beat expectations sending shares to a seven-year high. The North American leader in lighting and building management solutions has moved past the headwinds of supply chain disruptions that defined 2022 while benefiting from otherwise resilient economic conditions.

Indeed, the story here is impressive execution with a combination of pricing initiatives and efficiency improvements driving margin expansion. We like AYI for its combination of quality fundamentals supportive of a positive outlook.

That being said, we also have reasons to believe the upside for the stock may be limited from the current level in the near term. Valuation multiples have returned to the upper range of the company’s long-term average while the backdrop for otherwise soft growth works to dim any exuberance. We expect shares to consolidate recent gains through the next several quarters.

AYI Earnings Recap

AYI reported fiscal 2024 Q1 EPS of $3.72, well ahead of the $3.23 consensus estimate, and up 13% year-over-year. On the other hand, revenue of $935 million came in line with the market forecast, representing a decline of -6% y/y.

The context here considers an exceptionally strong adjusted gross margin that reached 45.8% compared to 41.7% in the period last year. Easing inflationary cost pressures as well as the impact of higher average pricing in a shifting sales mix across the brand portfolio toward more value-added categories added to the earnings strength.

Separately, a new state-of-the-art production line with higher capacity incorporating lower energy usage contributed to the adjusted operating margin that reached 16.5%, up 250 basis points from Q1 fiscal 2023.

So while the headline metrics are solid, we want to highlight an apparent divergence within the core operating segments.

The bulk of the business comes from the Acuity Brands Lighting [ABL] group where net sales declined by -7% y/y. Management explains some of that weakness against a particularly strong comparison period last year while focusing on the margin gains. This was partially offset by the 13% increase in net sales from the smaller Intelligent Spaces Group [ISG] segment even as that segment’s opening profit declined.

ABL covers lighting products that are typically installed in new developments between residential, commercial, and industrial applications. ISG captures more of the “tech” side of the business including software management tools and controller solutions for lighting management.

As we see it, the ABL operation is dealing with softer volumes reflecting the product level exposure to high-level macro themes between softer industrial production and weaker levels of new construction activity.

Simply put, Acuity Brands has done a good job of managing these market conditions, but those steps in financial engineering can only go far enough if the demand momentum is missing.

That view follows through with the current management guidance, projecting net sales between $3.7 and $4.0 billion for the year, down about -2% y/y at the midpoint. This is considered a continuation of the Q1 trends with ABL net sales down in the “low to mid-single digits” balanced by a stronger performance in ISG. The target for adjusted EPS is between $13.00 and $14.50 for the year, compared to $14.05 in 2023.

During the earnings conference call, management projected confidence while alluding to a possible revision of these same estimates at the midyear update following Q2 results.

Finally, we can bring up that Acuity Brands ended the quarter with $513 million in cash and cash equivalents against $496 million in total long-term financial debt. With more than $663 million in adjusted EBITDA over the trailing twelve months, we view the rock-solid balance sheet as a strong point in the company’s investment profile.

What’s Next For AYI?

There’s a lot to like about Acuity Brands that is well positioned to consolidate its market share with steady growth over the long run. At the same time, we sense that the breathtaking rally in recent months, up more than 40% just since October, has already incorporated many of the positives in its outlook.

Notably, the latest quarterly report was good enough that it drove a wave of revisions higher to the current 2024 consensus EPS estimate of $14.78, already above management’s guidance range. That being said, the market forecasts for revenue growth to average just around 3% annually through 2026 fail to inspire much confidence.

From a top-down perspective, the main operating drivers for the company continue to be the level of new construction activity and major real estate development. While the U.S. economy appears to be on firm footing, there is also an expectation that these areas will remain subdued for the foreseeable future, regardless of marginal changes to interest rates.

What we can say here is that expectations for AYI are now high which makes the next stage of the rally more difficult to justify.

What we have here is a stock that isn’t quite a “growth” name and doesn’t offer much in terms of compelling value trading at a 15x forward P/E multiple. That metric has averaged around 16x over the last 5 years, but that includes the post-pandemic era peak above 20x. The main difference between Acuity Brands today and in 2021 is that revenue growth was a much stronger 15% into fiscal 2022.

Final Thoughts

We rate AYI as a hold with a sense that a ~15x earnings multiple is fair for the stock under current circumstances.

On the upside, we would like to see growth re-accelerate beyond the low single-digit range to support a higher valuation. There is also a question of how much more room there is for the gross and operating margin to expand organically from what are already historically strong levels.

In terms of risks, weaker-than-expected results through the next few quarters would force a reassessment of the long-term earnings outlook and open the door for a deeper correction. Acuity Brands also remains exposed to macro trends with the potential for deterioration of economic activities undermining demand for lighting solutions.

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.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Add some conviction to your trading! Take a look at our exclusive stock picks. Join a winning team that gets it right. Click for a two-week free trial.

The post Acuity Brands: Likely At Fair Value Following Q1 Earnings Pop appeared first on Up2info.com.

• Acuity Brands Inc.’s share price has remained stable, but down 9% in the last 12 months.
• Short interest in AYI has grown to over 7%, potentially weighing on the share price in the short term.
• AYI needs to show top-line improvements quickly and demonstrate strong dividend raises and top-line growth for increased shareholder value.

Investment Rundown

The share price for Acuity Brands Inc (NYSE:AYI) has been incredibly stable this year as opposed to many other companies. The shares are down around 9% in the last 12 months but have stayed largely the same in the $150 – $170 range it seems. The most recent quarter from the company showed strength in the bottom line as margins expanded and AYI beat EPS estimates. On the top line, the revenues missed estimates and seem to have been a cause for the lackluster share price action over the last few weeks.

Over the last 12 months, it seems that short interest has grown for AYI and it now sits at over 7%. I think that this could weigh on the share price in the short term and the last quarter didn’t necessarily bring enough comfort or encouraging improvements that I can see the company being anything higher than a hold right now. The market it operates in is likely to grow over the coming decade very well, but AYI needs to show top-line improvements quickly. FY2023 resulted in 1% YoY sales declines, but EPS grew 10%. In the face of rising interest rates, this is a good result, but it doesn’t necessarily translate into significant shareholder value as the dividend yield is under 1% and AYI is instead creating value through buybacks. Despite the solid track record of that, the market doesn’t seem to care as the share price hasn’t moved much as discussed. Strong dividend raises and top-line growth are my key areas to watch, and until something major happens there I am sticking with my gut and calling AYI a hold here.

Company Segments

AYI is a leader in delivering cutting-edge lighting and building management solutions, catering to diverse markets across North America and beyond. The company’s operations are structured around two key segments: Acuity Brands Lighting and Lighting Controls (ABL), and the Intelligent Spaces Group (ISG).

Within the ABL segment, AYI offers a comprehensive range of commercial, architectural, and specialty lighting solutions. It’s not limited to just lighting products; the segment also provides an array of lighting controls and components designed for a multitude of indoor and outdoor applications, ensuring the perfect balance of aesthetics, energy efficiency, and functionality in various environments.

What a lot of investors may have on their mind is a strong recovery in the construction sector as that would likely result in boosted demand for AYI. The contusion and residential sector continues to be under a lot of pressure and I don’t see this as stopping quite soon. The rise in interest rates has caused demand to falter as capital becomes too expensive to acquire. Long-term this is just a bump in the road and not something that will reduce the investment case into something like a sell rating.

As far as the outlook goes for AYI right now it seems quite lackluster. FY2024 seems unlikely to post a YoY growth on overall sales as estimates come in at $3.85 billion. With the market cap at just over $5 billion, AYI is now trading at an FWD p/s of 1.3 which is a premium of 6% to the broader industrial sector. This is another factor that supports a hold right now, the fact that AYI doesn’t necessarily provide enough of a discount on some metrics. I may trade 28% below based on earnings, but that doesn’t help when the top line isn’t growing. Net margins topped out last year at 9.59% and I don’t think AYI is going to surpass that in the short term. Not when the demand for the sector is declining.

Earnings Highlights

During the third quarter of 2023, AYI faced significant hurdles due to persistent lead-time normalization trends and challenging macroeconomic conditions, which led to a notable 5.7% year-over-year reduction in sales, amounting to $1 billion. Within the Acuity Brands Lighting and Lighting Controls (ABL) segment, sales saw a decline of 6.7% year-over-year, totaling $940.7 million. For the fourth quarter of 2023, it seems there is some recovery at least for the bottom line as it grew to $3.97 and beat out estimates. Revenues was largely stagnant at $1 billion. This isn’t necessarily a bad thing, the company may have seasonal results sometimes, and seeing a lack of that makes for one case future revenues a little easier to predict.

From the last quarter, I think that the results weren’t perhaps where one would have hoped. Lacking sales growth showed what most were expecting from a softer market environment in construction. The positives came in the retention of EPS at least which was aided by the number of buybacks the company is doing. FCF has however been solid which has further aided the flexibility of the company, but I don’t think it’s enough to raise the investment case yet. In coming reports, I will be looking for sales growth at first, once that is clearly improving then it’s a matter of growing margins even more.

Risks

While their dedication to improving operational efficiencies is evident, it’s important not to overlook the significant 9% decline in their annual net sales. This decrease in sales volume, influenced by a combination of reduced demand and macroeconomic factors, underscores the need for a thorough evaluation of the company’s path to growth. This assessment should encompass strategies to navigate and adapt to the evolving market landscape while capitalizing on opportunities to enhance both revenue and overall performance.

While the previous quarter witnessed robust margin expansions for the company, the looming question arises: will this trend persist in the face of potentially rising interest rates? If these margins begin to contract as interest rates climb further, it’s conceivable that the market could relegate AYI to a lower valuation multiple, akin to the range of 10 to 13 where it has remained in recent months. This scenario may constrain immediate upside potential, underscoring the rationale for maintaining a “hold” position until a discernible trajectory of sustained margin growth becomes evident. Careful monitoring of margin performance in the changing economic landscape will be pivotal in guiding investment decisions.

Final Words

The construction sector has been under a lot of pressure as the interest rates rose in the US. This seems to have hurt the top line of AYI, which has seen stagnating and even declining results. The bottom line seems to have continued to be resilient though and I think he is a guiding light in the short-term, but not necessarily one that enhances the rating to something above a hold. Until there is a reversal in the sales trend and further fundamental improvements in the sector demand I will be viewing AYI as a hold.

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.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Acuity Brands: Sales Growth Recovery Before A More Optimistic Rating appeared first on Up2info.com.

• Acuity Brands’ non-residential markets have weakened, with both new-build and retrofit activity slowing more noticeably in recent months.
• Q4’23 results showed a decline in revenue, but gross margin exceeded expectations, continuing a multi-quarter trend of softer revenue and better margin.
• Management guidance for FY’24 is better than expected, but the outlook for end-user demand is uncertain and I see some downside risk.
• Building out the ISG business and adding more control functionality to its core platform could improve the long-term revenue growth outlook, but at the risk of near-term dilution.
• Acuity shares look undervalued and are worth monitoring as the non-residential cycle goes through its paces.

Writing about Acuity Brands (NYSE:AYI) back in January, I cited the risk of a weaker non-residential market in 2023 as a prime risk for the company and stock, and that has indeed come to pass. At the same time, institutional markets haven’t provided the offset that I’d hoped, and the company’s building controls business is just too small to fully offset that pressure.

These shares are up a few percentage points from my last update, disappointing relative to the broader market, but actually better than a fair number of other stocks leveraged to non-resi activity (like Assa Abloy (OTCPK:ASAZY), Allegion (ALLE), Otis (OTIS), and Johnson Controls (JCI)). Looking into the new fiscal year, I’m not feeling that bullish about the end-user demand situation, or at least not until the second half of calendar 2024. While the shares are still modestly undervalued, I think this will be a tough place to generate alpha until the outlook for non-resi improves.

FQ4’23 Results Outperformed A Lowered Bar

Acuity reported respectable fiscal fourth quarter earnings against sell-side expectations, but it’s worth noting that numbers declined throughout the year, so the company ultimately passed a lowered bar. Still, it’s better than the alternative.

Revenue fell 9% in the fourth quarter, missing by about 1% and marking the third straight quarter of below-expectation revenue. Acuity Brands Lighting (or ABL) posted a greater than 10% decline in revenue, missing by 3%, with the Independent channel down 8% yoy (after a 5.5% year-over-year decline in the prior quarter) and Direct down 5% (up 8% in the prior quarter). The Intelligent Spaces Group (or ISG) business grew 17%, beating by 6% and likely helped at least in part by an acquisition closed earlier in the year.

Gross margin has exceeded expectations going back into calendar 2022 and this quarter was no exception, with the 340bp yoy improvement (to 45.1%) driving a 100bp beat. Operating income fell 5% on my adjusted calculation (keeping amortization and stock expenses), with margin up 60bp to 14.1%, while company-reported adjusted operating income fell 4%, with margin up 80bp to 16.1%; both reported adjusted operating income and margin beat expectations (by 1.5% and 40bp, respectively).

At the segment level, ABL earnings declined 2% (margin up 150bp to 16.8%), beating by 1%, while ISG profits fell 3% (margin down 410bp to 19.7%), beating by 3%.

Reassuring Guidance … If They Can Achieve It

Management guidance for FY’24 wasn’t exactly robust, but it was better than expected. Management guided to a revenue range of $3.7B-$4.0B, with lighting down low-to-mid single-digits, and that compares reasonably well with the prior sell-side midpoint around $3.8B and the EPS guide was about $0.50/share higher (or 4%) at the midpoint.

It’s fair to question whether management can hit this target. Recent revenue trends have been running below expectations, and I don’t see near-term improvements in the company’s key markets.

While new construction held up pretty well throughout the year, it has been softening more noticeably in recent months as higher credit costs and more economic uncertainty take hold. With that, put-in-place activity should be weaker next year. Meanwhile, retrofit activity isn’t strong either – unless you’re talking about top-quality properties, building owners are reluctant to reinvest in properties today, and particularly in the retail and office spaces.

There are some more positive potential drivers to consider. First, management has been delivering on past pledges to drive increased product vitality; the company refreshed about 20% of the product portfolio in 2023 and new products have been good for market share (offsetting market weakness) and pricing/margin. Also, the company could still get some boost from institutional activity, as federal stimulus dollars should be more visible in 2024 (and contractors will have more capacity with the declines in other non-resi categories). Last and not least, the company has been building up its capabilities in the industrial and data center markets, and these are still among the strongest spaces in the non-resi space and likely to remain so.

Can ISG Become A Real Driver?

Regular readers know that I’m pretty bullish on the long-term opportunities in building electrification and automation, and control systems figure prominently in that ecosystem. Acuity competes here with its Distech controls business and its Atrius cloud/IoT platform, but the business is still rather small – generating less than 10% of overall revenue and segment profits.

Management did make an interesting acquisition earlier this year. I’ve previously said that this business needed to expand beyond its core lighting roots to really thrive, and the company acquired KE2 Therm (for what appears to be around $35M), a manufacturer of commercial refrigeration controls, earlier this year. While there’s only so much that this addition will do in the short term (it offers a more complete portfolio offering for a select group of Acuity customers), I like the overall direction.

The question is whether the Street will support a more aggressive move in this direction. Control, sensor, and software companies don’t generally come cheap, and I’m not certain that the Street will welcome near-term dilution even if it promises stronger long-term positioning in a growth business. Despite that risk, I expect further investments in this direction; Acuity has a clean balance sheet and generates good cash flow and can afford to deploy more toward M&A while also increasing returns to shareholders.

The Outlook

I’m bullish on what the ISG business could become, but I’m not modeling on that basis. With what, I’m looking for a soft FY’24 ($3.7B in revenue), a modest recovery in FY’25, and a stronger recovery in FY’26. I’m concerned that margin improvement will be more challenging given those revenue headwinds, but Acuity has shown some strength here of late and I’m modeling a little more than a quarter-point of EBITDA margin improvement and further improvements in the coming years.

Over the long term, my estimates work out to around 2.5% revenue growth, though there is upside here on the controls side. Looking at margins, I expect free cash flow margins to stay in the low double-digits, gradually improving toward 13% over time and driving a little upside to revenue growth.

Between discounted cash flow and margin/return-driven EV/EBITDA, Acuity still does look undervalued. I can get a fair value over $190 on discounted cash flow, while a 9.5x forward EBITDA supports a fair value of $183.50. I’d note that the actual “fair” multiple on the basis of margins and returns (ROIC) is actually closer to 10.5x (a $203 fair value); I’m using a 1.0x discount to account for the near-term risks in the non-resi market and the low growth of the underlying lighting market.

The Bottom Line

If you have a materially more bullish outlook on non-residential activity in 2024, this is a name to consider. My near-term concerns are that this is a value trap and that non-residential activity could be even weaker in 2024, driving more downward revisions and keeping the shares under pressure. Still, with the valuation where it is relative to what I think are realistic to conservative estimates, this name is worth monitoring.

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.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Acuity Brands Dimmed By Softer Non-Residential Markets appeared first on Up2info.com.