Acuity Brands (NYSE:AYI) is an industrial company specializing in lighting. With a portfolio of everything from home lighting to industrial lighting solutions, the company is diversified and well-recognized within its industry.
Despite this, shares of AYI have lagged in the past year, appreciating by less than 5% during that time so is Acuity a good stock to buy now, or has the market held off on AYI for good reasons?
Acuity’s Revenue, Earnings and Growth Outlook
In Q1, Acuity delivered net sales of $952 million, up 2% from a year earlier. Diluted EPS grew at a faster rate, rising 4% to $3.35 per share. Free cash flow, however, was significantly weaker, having dropped about 35% to $113.3 million.
One of the largest developments the company saw last quarter was the acquisition of QSC, a company that had built an audio, visual & control platform that offered significant synergies with Acuity’s Intelligent Spaces segment. The deal, originally announced in October of last year, was made at a purchase price of $1.22 billion. Acquisitions of this sort could be major drivers of growth for Acuity going forward, as they give it the opportunity to deploy some of its cash to build accretive value.
Speaking of cash, Acuity ended Q1 with $935.6 million of cash and cash equivalents, up from $845.8 million in the year-ago quarter. While weaker free cash flow is a concern, this reserve gives the company a fairly decent amount of room to maneuver in the event of an economic downturn or other factors that could put pressure on sales.
The good news for investors is that Acuity’s earnings growth isn’t expected to be short-lived. In fact, the EPS growth outlook for the next 3-5 years calls for annualized earnings growth of about 10%. Using the current trailing 12-month EPS of $13.19 as a starting point, this would have Acuity earning around $21.25 annually in about five years.
AYI May Be Somewhat Undervalued
At 20.6x earnings, 2.2 times sales and 3.3 times book value, AYI isn’t exactly a screaming value buy. It does, however, trade a fair bit below the current S&P 500 average P/E of 25.1. Given the steady growth that Acuity is expected to produce over the coming few years, this may indicate that AYI is moderately undervalued.
There also seems to be room for significant upside in Acuity. The analyst consensus estimate of $315.25 implies a gain of about 16% from the most recent price of $271.39. This would likely result in AYI shares beating the market over the coming 12 months. It’s also encouraging to note that the lowest price target for AYI is $275, at which shares would remain essentially flat. As such, it doesn’t appear that analysts currently see a great deal of downside risk in Acuity.
AYI Dividends and Share Buybacks
Acuity’s dividend yield of 0.24% is quite low but where an income shortfall exists, growth opportunity sits on the horizon thanks to a minuscule payout ratio of just 5%.
Share buybacks have also been a stalwart for shareholders with the total number of outstanding shares down from a high of 44 million in 2016 to its current level of 32 million. Although the share count blipped slightly late in 2024, Acuity persisted in buying back $5 million worth of its own stock.
With earnings forecasts upbeat, the leadership team has the flexibility to allocate more cash to the shareholders. It’s worth noting, however, that the company has only been paying dividends for three years.
Will Tariffs Derail Acuity?
Although Acuity looks decently attractive from many perspectives, it’s also important to understand where pitfalls exist.
To begin with, the reliance on electronic components produced abroad could expose it to higher input costs associated with rising tariff barriers. Although the Trump administration’s proposed tariffs are mostly on hold as of the time of this writing, there are remarkably few guarantees about what US trade policy will look like going forward until formal trade deals are finalized with America’s large trading partners.
Acuity may very well also be hit fairly hard by a downturn in economic activity if a recession begins later this year. Despite its portfolio of commercial, residential, industrial and architectural lighting solutions, Acuity is likely to see a downturn in revenues in the event of a recession that caused reduced investment in building projects, upgrades and renovations.
A final problem with Acuity may come from assumptions about its gross margins, which have risen nicely in recent years. Although the company has done a good job of raising gross margin, analyst forecasts more or less assume that it will continue at its present level. With big picture challenges potentially ahead, the company could see its gross margins contract again and miss analyst forecasts.
Is Acuity a Good Stock to Buy in Today’s Market?
Acuity may be a better hold today than it is a buy given the risks of tariffs on the horizon.
While there are decent arguments for owning the stock, buying today does expose investors to several pitfalls and uncertainties that may not fully be justified by the its expected upside. Although a stronger dividend could go some way to making up for this, Acuity may not produce enough current income to appeal to most dividend investors.
With that said, Acuity could be a good stock to watch going forward. If the price sinks a bit more and presents a more attractive entry point or if the economic picture becomes clearer, Acuity could become a good stock to buy. Until then, though, there may be better options out there for investors seeking good values on solid, reliable businesses.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.