Acuity (NYSE:AYI) is an industrial technology company that specializes in lighting solutions and intelligent spaces. Coming off of a strong earnings report that was released in June, shares of AYI are up by nearly 17 percent on a 3-month basis and more than 30 percent over the last year. Is Acuity stock a buy now, or should investors consider looking elsewhere for stocks with more potential room to run?
Acuity’s Revenue Growth Bouncing Back
Recently, Acuity’s revenue growth has picked back up after a period of retreat that spanned 2023 and 2024. In its most recent quarterly report, the business detailed net sales growth of 22 percent to $1.2 billion. This drove a significant increase in adjusted operating profits to $222 million. On a non-adjusted basis, however, operating profit dropped by 4 percent compared to the year-ago quarter to $140 million.
Acuity’s Intelligent Spaces business segment was by far the largest growth driver, with net sales rising nearly 250 percent to $264.1 million. Much of this gain can be attributed to the strategic acquisition of cloud lighting, video and audio company QSC late last year. Though the growth rate is unlikely to remain this strong going forward, it’s fairly clear that Acuity has a large opportunity for expansion with ASI.
Much as with operating profit, a disparity also emerged between adjusted and GAAP earnings performance. On a GAAP basis, Acuity delivered earnings of $3.12 per share, a 14 percent decline from the previous year. The adjusted EPS, however, was 23 percent higher than the year-ago quarter at $5.12. Adjustments accounting for this difference included $20.0 million of amortization of intangible assets, $19.2 million of acquired profit in inventory and $29.7 million in special charges.
Although Acuity isn’t able to deliver the kind of extremely high margins that some businesses can, it’s still respectably profitable with a trailing 12-month net margin of 9.6 percent, an operating margin of 14.6 percent and an ROE of 16.5 percent. This ROE is of particular note, as it’s nearly double the sector average of 8.6 percent. Despite a slight contraction over the past year, Acuity’s long-term net margin trend has also been one of gradual positive expansion.
Even Acuity’s balance sheet is fairly attractive, featuring as it does total liabilities of $2.1 billion compared to total assets of $4.6 billion. Although long-term debt has nearly doubled to just short of $1 billion over the past year, Acuity appears to be in a decent position to handle this level of debt without undue risk.
If we take a shot at what the next 5 years will look like, analysts expect to see earnings growth in or around 10% on an annualized basis. That’s not stellar, especially considering the high levels of revenue growth the business is already producing but it keeps pace with the market.
Is AYI Fairly Valued?
Right now, AYI shares are trading at 24.7x earnings and 2.4x sales, both well above the sector averages of 18.9 and 0.9, respectively.
While Acuity may be able to support this valuation, the stock is only trading about 6% below the average analyst price target of $335.57.
Acuity’s Dividends and Share Buybacks
In addition to its renewed growth, investors will also likely find Acuity’s habit of returning cash to its shareholders through a combination of dividends and share repurchases quite appealing. In the last reported quarter alone, Acuity bought back about 344,000 of its own shares for a total of $91.3 million.
The dividend yield is low at just 0.2 percent but the most recent dividend increase saw the quarterly payout rise by 13 percent to 17 cents. Those figures represent a very small portion of its GAAP quarterly earnings, but management may be able to raise the dividend more aggressively going forward than it has historically.
Tariffs Threaten
High tariffs can’t be understated as a torpedo to threaten the business model now.
Though Acuity can manage its tariff risks by passing the costs through to customers while carefully controlling its own expenses, the global supply chain is likely to still put pressure on margins going forward.
Even with tariff rates now lower than the ones that were proposed in April, the increased cost of importing goods and materials could weigh on Acuity’s bottom line.
Is Acuity a Buy?
With revenue growth rebounding, good profitability, and strong chances for further earnings growth as well as a penchant for returning cash to shareholders, Acuity is in a good spot and a competitive position within the professional lighting market that could give it a decent moat.
On the other hand, Acuity is trading at a valuation that, while perhaps not completely unreasonable, may very well limit upside for new shareholders. It trades at something of a premium for an industrial business, and gains from here are likely to be significantly slower than what the stock has produced over the past year.
Recent institutional investment activity may somewhat support this view because large investors have been selling AYI shares at a faster pace than they’ve been buying them since 2023, a surprisingly consistent period of institutional drawdowns. While this doesn’t necessarily rule Acuity out, it does seem to indicate that institutional investors may not see enough upside left in AYI to keep buying it.
At the moment, Acuity looks like it could be a possible buy for investors seeking steady growth vehicles, though it likely won’t replicate the kind of rapid gains it has delivered in the past 12 months. Acuity may not appeal much to high-risk, high-return investors, but it could have the potential to deliver long-term compounding returns that may win over more conservative investors.
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.