Acuity Brands Lights Up Opportunity In The Industrial Sector

Key Points

• Acuity Brands' mixed quarter is offset by margin improvement and earnings strength. 
• The company bought back more than 4.25% of the market cap in the 1st 9 months of the year. 
• Institutional support is high and growing, consistent with a bottom in the price action. 

Acuity Brands NYSE: AYI helped light up an opportunity in the industrial sector when it reported earnings in late June. The industrial sector is 1 of only 5 sectors expected to report earnings growth in 2023 and is seeing robust upward revisions. Revisions are driven by results from Acuity Brands, H.B. Fuller NYSE: FUL, and metal processors like Schnitzer Steel NYSE: SCHN and Commercial Metals Company NYSE: CMC, which point to solid underlying demand in most end markets. 

In many cases, the demand is supported by government spending tied to the COVID stimulus, the Inflation Reduction Act, and the Infrastructure Investment and Jobs Act. A shift to digitization, technology, and intelligent operations supports business in others. The bottom line is that Acuity Brands is producing robust cash flows, pays a small but incredibly reliable dividend, and buys back shares, and the Industrial Sector ETF NYSEARCA: XLI is on track to break out to new highs. 

Acuity Brands Has Mixed Quarter: Bottom Confirmed 

Acuity Brands had a mixed quarter, with revenue of $1 billion falling 5.7% compared to last year and missing the Marketbeat.com consensus by 470 basis points. The miss was driven by a 6.7% decline in the core Acuity Brands Lighting segment, offset by a 12.9% increase in the ISG segment.

Intelligent Spaces Group's growth is aided by the acquisition of KE2 Therm, which is expected to drive new customer acquisition and deepen penetration of services to existing clients. KE2 Therm is a smart-refrigeration company that aids businesses in reducing energy costs, improving product shelf life, and widening margins. 

Acuity Brands' margin news is what helped to offset the top-line miss. The operating profit margin improved by 100 bps GAAP and 120 bps adjusted to leave the earnings above the Marketbeat.com consensus. The $3.75 in adjusted EPS is $0.02 better than expected and up 7% compared to last year.

The company doesn’t give guidance but shows momentum in operational quality, if nothing else. The company’s earnings outpaced consensus and produced sufficient capital to complete the KE2 Therm acquisition without increasing debt while paying dividends and repurchasing shares. 

The dividend isn’t large at 0.35%, less than the XLI, which pays closer to 1.6%, but share repurchases compound the distribution. The company repurchased 1.3 million shares in the 1st 9 months of the year for $219 million. That’s worth about 4.3% of the market cap in early July, and the company says it will continue repurchasing shares. Notably, the institutions own about 95% of the stock and have been buying on balance for the last year. Net flows are bullish, with buying outpacing selling by 1.7:1, and the activity ramped in Q1 and Q2 2023, coincident with a bottom in the market. 

Analysts Say: Acuity Brands Is A Moderate Buy

The analysts haven’t had anything to say about Acuity Brands’ Q3 results which is telling. The consensus sentiment ahead of the report was Moderate Buy, which is still in effect. The price target has come down slightly compared to last year but is steady in the near and mid-term, projecting about 16% of upside for the market.

The price action is mixed. The stock is trending sideways within a range that is still in effect. However, the bias shifts to the upside and could produce a reversal. The critical resistance point is near $169 and the long-term EMA. A sustainable rally may form if the market can get above that level.