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Acuity Brands Banks on Buyouts, Competition & Costs Pose Risk

Zacks Equity Research

On Jun 13, we issued an updated research report on Acuity Brands, Inc. AYI -- manufacturer and distributor of lighting fixtures and related components.

The company’s leading market position along with diversified portfolio of innovative lighting control solutions and acquisitions are driving growth. However, economic volatility, escalating costs and reliance on one client might mar prospects.

Notably, Acuity Brands’ shares have lost around 20.7% so far this year, almost on par with the Zacks categorized Building Products - Lighting Fixtures industry’s 20.3% decline. Meanwhile, estimates for the current year and the next have moved up by 0.5% and 2.3%, respectively, over the last 60 days.



Key Positives

Acuity Brands is the leader in the North American nonresidential lighting fixture market, courtesy of its Lithonia brand. The company is focused on capitalizing on opportunities by continually expanding and leveraging on its industry-leading lighting and building management solutions. Also, the company’s extensive market presence and financial strength are major positives. Cash and cash equivalents, as of Feb 28, 2016, were $463.2 million, up from $413.2 million in fiscal 2016. Acuity Brands expects its addressable market to grow 30–35% over the next several years buoyed by the energy efficiency-driven relight market.

We are encouraged by Acuity Brands’ strategy to expand its geographic borders and product portfolio through acquisitions and joint ventures. The addition of DGLogik in 2016 supports the company’s strategy to enhance its portfolio of holistic Internet of Things (IoT) solutions. In Dec 2015, the company made two acquisitions. The first one was of Juno Lighting LLC, a leading provider of down lighting and track lighting fixtures for both residential and commercial applications, while the other one was of Geometri, LLC – a provider of a software and services platform for mapping, navigation, and analytics.

Concerns

Acuity Brands operates in a highly competitive industry that is affected by volatility owing to a number of general business and economic factors, such as gross domestic product growth, employment levels, credit availability, energy costs and commodity costs. The company thrives on residential and non-residential construction, which is sensitive to volatility induced by economic factors. Also, heavy dependency on one customer, i.e. The Home Depot (HD) may prove detrimental to sales.

Moreover, energy efficient lighting products like LED fixtures need extensive research and development and hence involve costs. Higher spending on research and development may dent margins and thereby the bottom line of the company.

Zacks Rank & Stocks to Consider

Acuity Brands carries a Zacks Rank #3 (Hold).
 
Better-ranked stocks in the broader construction sector include Lyon William Homes WLH, M/I Homes, Inc. MHO and KB Home KBH.

M/I Homes sports a Zacks Rank #1 (Strong Buy) and is likely to witness 36.2% rise in earnings. You can see the complete list of today’s Zacks #1 Rank stocks here.

Lyon William, a Zacks Rank #2 (Buy) stock, is expected to exhibit 38.4% growth in 2017 earnings.

KB Home, a Zacks Rank #2 stock, is expected to witness 43.3% growth in fiscal 2017 earnings.

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