Acuity Continues To Execute, But Weaker Non-Resi Trends Seem To Be Weighing On Shares

One of the more frustrating investment situations to be in is to see a company executing a little better than expected, but see the shares drift lower anyway. Such is the case with Acuity Brands (NYSE:AYI), where two decent quarters (relative to sell-side expectations) and inline guidance for FY’23 hasn’t been enough to maintain investor enthusiasm. Down about 5% since my last update on the company, Acuity has modestly outperformed the S&P 500 but underperformed the broader industrial space, including other non-resi-skewed comps like Allegion (ALLE), Hubbell (HUBB), Johnson Controls (JCI), and Otis (OTIS).

I’ve written in the past about the risk of “boredom” with this stock; it’s not well-covered and the long-term growth potential in the core business (lighting) isn’t very exciting. Still, while recognizing risks like increased competition from overseas lighting manufacturers and overpaying for growth-oriented M&A (for the Intelligent Spaces Group, or ISG), not to mention my weaker-than-the-Street outlook for non-resi activity in 2023/24, the share price does look too low to me and this may be a name for value-driven investors to consider.

 

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Acuity Continues To Execute, But Weaker Non-Resi Trends Seem To Be Weighing On Shares

Acuity Brands Doing More Than Just Keeping The Lights On

There's no better way to quiet doubters than to consistently execute well, and despite challenges from stressed supply chains and some volatility in end-market conditions, Acuity Brands (NYSE:AYI) has been executing rather well, surpassing expectations on multiple occasions since my last update on the shares about two years ago.

AYI shares are up more than 75% since that last article, handily outperforming the average industrial stock and other industrials with significant non-residential exposure like Allegion (ALLE), Carrier (CARR), Hubbell (HUBB), Johnson Controls (JCI), and Trane (TT). Even with that strong performance, I wouldn't necessarily say that the shares are getting their full due, as they still appear undervalued on both cash flow and margin/return-driven EBITDA.

 

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Acuity Brands Doing More Than Just Keeping The Lights On

Far-UVC Could Flip The Switch For Growth At Acuity Brands

The going remains tough for Acuity Brands (AYI). While I don’t really love the business, I thought back in January that the valuation seemed low relative to even modest (low single-digit) long-term growth assumptions, but the shares have since underperformed the industrial group, perhaps due to the company’s high exposure to non-residential new-build construction and relatively little exposure to green building retrofits, as the LED upgrade cycle is largely mature.

Now there’s a new potential driver to consider – Far-UVC lighting as a retrofit product for building hygiene. Unlike conventional UVC systems, Far-UVC lighting systems can kill viruses, including SARS-CoV-2, but are still safe to use while the building is occupied. Given the sheer installed base for potential retrofits, this could provide an important spark to Acuity’s story in calendar 2021 – and the stock really could use a spark, as although it continues to look undervalued on undemanding expectations, the Street has shown it really isn’t interested in commercial lighting businesses.

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Far-UVC Could Flip The Switch For Growth At Acuity Brands

Acuity's Volume Declines Are Worrisome, But The Market Reaction Seems Extreme

The markets typically care more about margins than revenue … until they don’t. While Acuity Brands (AYI) once again did well on the margin lines, the market seemed more than just spooked by the severe year-over-year erosion in volume. I’d also assume that the weaker call on non-residential construction, one of the markets expected to be stronger for multi-industrials this year, didn’t exactly help matters.

I don’t love lighting as a business and I think Acuity has a long way to go before its more sophisticated control and IoT businesses kick in meaningful contributions. Even so, I’m surprised the shares trade where they do. I mean, I get that the market doesn’t like lighting stories, but that seems overdone here. It’s tough to buy into a sector that I don’t really like, and I know the undervaluation here could persist (particularly if volume stays so weak), but the valuation is enough to make this a name to keep watching.

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Acuity's Volume Declines Are Worrisome, But The Market Reaction Seems Extreme

Hubbell Looking To Self-Help And A Cyclical Boost

Later-cycle plays have gotten more attention as this year has gone on, and with that electrical product and lighting specialist Hubbell (HUBB) has closed some of its multiyear performance gap relative to industrials, with the stock actually outperforming the Industrial Select Sector SPDR ETF (XLI) over the past year as well as handily outpacing Acuity (AYI) as well. Add in the Aclara acquisition, ongoing restructuring efforts, and an apparent willingness to address the lighting business more directly, and I can see why these shares have done well in recent months.

As far as valuation goes, Hubbell is more of a lukewarm prospect to me now. I like the potential of what facility consolidation, automation, and supply chain improvements could bring, but margins have been weak for a while despite an ongoing effort to restructure. Likewise, while I like the diversification that Aclara brings, lighting remains a tough market. The perception of Hubbell as a late-cycle play should aid sentiment, and the shares do have some upside on an EV/EBITDA basis, but the overall long-term return potential looks more or less in line with most other industrial names.

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Hubbell Looking To Self-Help And A Cyclical Boost

Investopedia: Hope Seems To Outshine Reality At Acuity Brands

It has been almost two years since I last wrote on Acuity Brands (NYSE:AYI), and in that time the company has seen only the barest recovery in residential and commercial construction, the acquisition of a major competition by a large conglomerate, and the advancement of LED lighting as a more feasible alternative. It is this last item that is likely to be the biggest driver for Acuity, as a switch to more efficient LED lighting could stimulate significant sales. As often seems to be the case with Acuity shares, though, it seems like investors are already well ahead of curve on this name.

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Investopedia: Acuity Shines A Little Brighter

There are plenty of reasons the lighting market should be a little dim these days. Residential construction activity is almost nonexistent in many major markets, Home Depot (NYSE:HD) and Lowe's (NYSE:LOW) are not seeing much renovation demand, and commercial real estate is scarcely better. On top of that, customers have other pressing financial obligations that take precedence over swapping out inefficient lighting fixtures, and many consumers are resisting the mandatory switch away from incandescent lights. 


So with Philips (NYSE:PHG) already forecasting a bad quarter from lighting, Siemens (NYSE:SI) backing that up and Cree (Nasdaq:CREE) struggling mightily, it would only make sense for Acuity Brands (NYSE:AYI), the No.1 lightning equipment company in North America, to be struggling as well.

Third Quarter Results Not As Bad As Feared
Given the gloomy guidance from Philips and Siemens, Acuity actually seemed to do quite well this quarter. Revenue was up 12% (up 9% on an organic basis) and nearly matched the high-end estimate on the Street. Growth was boosted by volume (up 5%), and the company seems to be succeeding in pushing through price increases. 




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Acuity Brands Still Waiting For The Turn

Non-residential construction is still in a dark place, and that has kept the prospects for Acuity Brands (NYSE:AYI) dim as well. Even still, this leading lighting company has managed to tread water through difficult times and could be relatively close to a turning point. 

The Quarter That Was
The company's fiscal fourth quarter was another tough one, but Acuity nevertheless managed to surprise and surpass the analyst expectations. Revenue rose 5%, helped by a 6% boost in volume. Although the companies' quarters do not line up evenly (Acuity has a August year-end), this result is somewhat mixed relative to rival lighting companies - Hubbell (NYSE:HUB.A) had nearly 11% growth in the last quarter, while Cooper (NYSE:CBE) had a little more than 5% growth.

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