Acuity May Benefit in Trade War With China
- By Holmes Osborne, CFA
Acuity Brands Inc. (AYI) is a manufacturer of commercial and residential lighting. The growth and financials have been very strong. The company is almost completely focused on North America and could benefit from the trade war with China. The stock is way off its high set in 2016. Major research companies have been a little weary of the stock.
Warning! GuruFocus has detected 2 Warning Sign with AYI. Click here to check it out.
The intrinsic value of AYI
The stock trades for $122, there are 39.49 million shares and the market cap is $4.8 billion. Earnings per share were $8.82 and the price-earnings ratio is 13.8. The dividend is 52 cents and the dividend yield is 0.4%. That's a nice price-earnings ratio.
Sales growth has been strong, climbing from $2.7 billion in 2015 to $3.7 billion in 2018. Earnings grew right along from $222 million to $350 million over the same period. Free cash flow has been extremely high and was $310 million last year. The free cash flow yield is 6.46%. That's a nice free cash flow yield for a growing company. Profit margins are 9.5% and the return on equity is 20.6%.
The balance sheet is incredibly strong. There is $215 million in cash and $557 million in receivables. The liability side shows $390 million in payables and $357 million in debt.
Acuity receives 97% of its sales from North America. I don't remember the last time I looked at a manufacturer that had such a high percentage of sales in one area. About 50% is new construction and 50% renovation, while 85% is non-residential and 15% residential. Some of its brands include: indy, Juno, Lithonia, Winona, iota and several more. As one might expect, its lighting is used in buildings, shopping centers and hospitals.
S&P has a target price of $110. Analysts expect sales to increase 4% in 2019, but for Acuity to face headwinds. S&P expects gross margins to fall 1% to 39.7%. S&P has a "sell" opinion, citing "continuing lighting, market softness, rising costs and increasing market competition." You don't see a lot of sell reports.
Credit Suisse put out a report on the lighting industry that said, "Lighting price is notoriously difficult to measure, given projects, high SKU count, and local channel dynamics." HUBB and ETN also portend good things for the industry. Credit Suisse is neutral on Acuity, but has a target price of $128.
I found the stock by looking at IVA Fund's holdings on the SEC website. IVA seems to have some interesting ideas. Vulcan Value also owns shares and is bullish with tariffs on Chinese imports as Acuity has the majority of its manufacturing in North America. There is a class-action lawsuit in regard to management not disclosing certain industry trends to shareholders.
I was curious to see what was available in the retail channel. On Lowe's website, I found the Juno brand. Most of the products are office lights that are recessed. They sell for about $15 to $30. The Lithonia brand sells LEDs and track lighting. Both offer hundreds of brands at the home improvement retailer. I see that the products are offered on Amazon as well.
Is the stock a buy? If the U.S. economy keeps going and commercial building keeps it up, then yes. The financials are nice: growing revenues and income, high free cash flow, strong balance sheets, high profit margins and return on equity. If you think commercial building will come to an end, then no. I'm just kind of bearish on this 10-year run that we've had in the economy. I feel like the markets have to correct someday. The stock has been on a downward trajectory and that makes me feel like you'd be catching a falling knife. Perhaps if the stock can trade sideways for awhile it could be interesting. I'm just worried about a stock that is headed downward and the economy at its peak.
Disclosure: We do not own shares.
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This article first appeared on GuruFocus.
Warning! GuruFocus has detected 2 Warning Sign with AYI. Click here to check it out.
The intrinsic value of AYI
