Thursday, May 24, 2012

Acuity Brands Stock Research

Acuity Brands $AYI is a manufacturer of indoor and outdoor lighting and as such, is the sort of stock that has been bid up as the market prices in a recovery in the North American real estate market. Alongside its rival Cooper Industries $CBE and other real estate darlings such as Masco $MAS these stocks have been surging this year.

A quick look at a recent price chart, reveals that Acuity has been up as high as 80% above the October lows. When Warren Buffet is talking about a recovery in his annual letter, than investors can feel heartened, even after this strong rise. Longer term, the trends do look good, and Acuity has growth prospects via the increasing use of energy efficient LED lighting.

Acuity is geared to the commercial real estate market and is the market leader in commercial indoor and outdoor lighting. It is also the leader in industrial lighting as well as a major player in the residential market too.

So what happened after the Q2 results? Why the big sell off?


Acuity Q2 Results

Firstly, Acuity managed to beat revenue guidance but they missed on adjusted diluted EPS estimates.
  • Revenues at $457.7m vs. $455.4m estimates
  • Adjusted diluted EPS at 57c vs. 62c estimates
The market loves to punish companies for an earnings miss and with the recent market weakness, it is not surprising to see Acuity sold off after a very strong run. There are, however, a few extenuating factors here.

Firstly, the tax rate in the quarter was a 35.4% which is higher than last year’s rate of 31.4% thanks to the non-extension of a research and development tax credit. This cost Acuity 3 cents of EPS in the quarter, although management stated that the full year tax rate was likely to be 34%.

Secondly, Acuity reported a loss of $1.3m in Spain in the quarter. This is equivalent to 3 cents of diluted EPS and frankly, I’m not surprised. Spain’s commercial real estate market is in a consolidated decline and there are few signs of a quick turn around. However, the company is taking the right steps and downsizing operations in Spain. Moreover, Spain now represents less than one per cent of sales.

Thirdly, the company took a special charge of 11c relating to a reduction in the sales force in Spain and the closure of a plant in Cochran, Georgia. These streamlining efforts will allow Acuity to benefit from cost savings which should improve margins in the future.

In conclusion, the earnings miss is not really of sign of any underlying problems that Acuity can’t address, if the company is not doing so already.


A Commercial Property Recovery in Site?

As ever, an investment decision will have to be based on a sense of recovery for the US commercial property market. Whilst, Acuity described the five per cent increase in unit volumes as being ‘broad-based’ across products and sales channels, the market will want to see more evidence before taking Acuity higher. On the conference call, management referred to low to mid single digit growth for the North American lighting market for the remainder of 2012. This figure tallies with Acuity’s reported volume growth in the quarter, so it is reasonable to expect that Acuity can achieve single digit growth rates throughout 2012.

Analysts have 7.8% revenue growth pencilled in for 2012, and Acuity is likely to achieve this, provided the trend towards a more favorable pricing mix continues. Management acted quickly in 2011 and increased prices in selected lines, in order to counteract a less favorable sales mix. So, we know they are on the ball.

Moreover, the streamlining efforts will aid margin growth in time and the current glut of LEDs (thanks to over capacity in China) could result in some abating of pricing pressures. Companies, like Cree $CREE and SemiLEDS $LEDS have had pricing problems due to industry overcapacity over the last year. Similarly, if there is going to be a sharp slowdown in China’s real estate market then this too, will alleviate input pricing pressure.


Time to Buy Acuity?

I rather like the trends being discussed and, believe that with the positive trends in US employment, the outlook for property in the US is better than it has been for years. The banks are starting to loosen up on Commercial and Industrial lending, and the US banks bad debt ratios are still falling. Its time for them to start lending.

The signs do look positive and Acuity will possibly be a winner if there is a sharp slowdown in Chinese fixed asset investment. This is definitely a stock worth monitoring and I think it might be worth picking some up around if the sell off continues to the $55 mark. Sometimes the market over reacts.