Acuity Brands Wobbles After Strong Q3 Results
Acuity Brands (NASDAQ: AYI) has been in a downtrend for the last two quarters for no other reason than fear of slowing growth, tightening margins, and earnings weakness but those fears were overblown. The move downward was driven in large part by institutions that were selling heavily in the first quarter of the year. Now that the company has outperformed expectations for the first half of the year and given no indication of upcoming weakness we think there is a bottom in play. Not only do the results suggest a higher valuation is warranted but the institutional activity has taken on a new tone. No longer are the institutional players heavy sellers or even net-sellers, they’ve begun to accumulate the stock again and we think the activity will gain momentum now the Q2 results are in.
Looking at the analyst activity, we think there is a significant amount of upside as well. There have been no commentaries since the Q2 report, not yet, but we think the analysts are rethinking a recent round of price target reductions that has the Marketbeat.com consensus hovering near $210. The takeaway here is the analysts believe the stock has at least a 35% upside and rate the stock a Moderate Buy and that was before the strong Q2 report. In our view, the stock may not receive any upgrades but we are expecting to see the consensus target trend higher over the next few months.
Acuity Brands Grows Revenue, Widens Margin
Acuity Brands had a very strong quarter underpinned by gains in the retail and construction end of the lighting market. The company reported $1.06 billion in net sales for a gain of 17.8% that beat the Marketbeat.com consensus by 725 basis points. On a segment basis, the core Acuity Brands segment led with a gain of 18.6% driven by a 24% gain in retail sales and a 34% gain in Construction sales. Within that group, Independent sales grew by 15.6% and Direct sales were flat YOY. The much smaller ISG segment, Intelligent Solutions Group i.e. smart-lighting, grew by a smaller 5.2%.
Moving on to the earnings, the news is a little mixed but nonetheless bullish for the stock. The company reported a 100 basis point contraction in the gross margin that was offset by a 40 basis point improvement in the operating margin. On an adjusted basis, the operating margin improved a tepid 10 basis points but expand it did and all margins were better than expected. On the bottom line, the GAAP $3.07 grew by 30% YOY while the adjusted $3.52 is up 27% YOY and beat by $0.61 or 2000 basis points. That’s some strength.
The company did not give any guidance but we see underlying strength and momentum in the business. The risk is that demand may fall off in the back half of the year as rates rise and housing starts to stall, but cash flow and earnings should remain strong enough to support the dividend and buybacks. The takeaway here is the dividend is safe and buybacks should be expected to continue. The company bought back $296 million worth of shares this quarter, about 5.5% of the market cap, and it improved the balance sheet while increasing inventory.
The Technical Outlook: Acuity Brands Is At A Bottom
Acuity Brands is at the bottom but it may not be ready to rebound just yet. The price action hit a new low the week before earnings were released and a bounce is in play but the market looks indecisive. In this light, price action may retest the recent low or even move lower due to general market conditions and not the business fundamentals. In this scenario, the stock will become more attractive but there is an equal risk in waiting. If the market is able to hold the current levels, the stock could easily bounce back to the $170 level or higher.
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