Its Time To Focus On Acuity Brands (NYSE:AYI)

Acuity Brands Business Is A Two-Edged Sword

When it comes to the pandemic there are company’s in a good position and those in a bad position to capitalize on trends it sparked. When it comes to construction and construction-related supplies a good position might be a focus on consumer or home improvement. A bad position might be a focus on industrial or commercial construction and that is where the conundrum lay with Acuity Brands (NYSE:AYI).

Acuity Brands makes all manner of lighting solutions for commercial, industrial, residential, and consumers. The residential and consumer end of the business is booming, inventories are flying off the shelves and the data suggests that trend has legs. The commercial and industrial side is lagging, but not as bad as you might think. The Q4 numbers declined from the previous year but not as bad as feared and the outlook is at least stable. With shares down more than 7.0% on the earnings news, the market is offering a discount to what was already a low valuation on a very sound company. It may not be time to buy this stock now, but it will be very very soon.

Acuity Brands Beats Consensus On The Top And Bottom Line

The top-line revenue came in at $891.2 million or down 5.0% from last year. The decline in revenue is not great but explained by the pandemic and better than consensus by nearly 800 basis points. Gross margins held flat over the past year at 42.1% putting GAAP EPS at $1.87 and adjusted at $2.35. The GAAP EPS beat by $0.20, adjusted by $2.35 although both are lower on a YOY basis. In terms of the year, the company exceeded consensus by the same $0.34 margin and looks like it will beat in the next year as well.

The analyst is expecting revenue to increase slightly over the next year but EPS to fall. This outlook does not jibe with the company’s results or commentary which point to steady results if nothing else. Based on the strength I’m seeing in the residential and home-improvement sectors and the company’s efforts to preserve capital I expect to see these estimates begin to move higher.

“We continued to demonstrate the durability of our business and our ability to generate cash despite challenging market conditions. We believe the uncertainty around the economic recovery due to the COVID-19 pandemic remains and, as a result, we expect weakness in nonresidential building activity based on current construction indicators. As we look forward to fiscal 2021, we see an opportunity to leverage our expanded product portfolio in lighting, lighting controls, and intelligent buildings along with our investment in our digital transformation to expand market share.”

Slow Business? Acuity Brands Is Still A Cash-Flow Fortress

Acuity Brands pays a dividend but it is a paltry amount yielding a mere 0.45%. That said, the company’s income statement, balance sheet, and cash flow are something to be reckoned with. The company is only paying out 5% of its earnings and sitting on a mountain of cash relative to its size. Regarding cash flow, cash flow for the fiscal year topped $505 million to set a new record. Taken together, this points to sustained dividend payments and the Acuity’s ability to do whatever it needs to in its efforts to build the business.

Acuity Brands Sheds 7.0% After Fiscal Q4 Earnings

Acuity Brands share prices fell more than 7.0% in the wake of the release but this may be due more to short-selling than anything else. The stock is lightly traded and short-interest was pushing 10% before the release, enough to weigh on any stock with a tepid forecast. Today’s move confirms resistance at the post-correction highs but does not spell doom for the stock. Not total doom, anyway. Support may kick in at the short-term moving average or, if not, a little lower near the $100 level. Longer-term, I expect to see this stock continue to trend sideways until a broader rebound gets underway in the construction sector.