Acuity Brands, Inc. (AYI): Can This Stock Keep Lighting Up Your Portfolio?

Page 1 of 2

Acuity Brands, Inc. (NYSE:AYI)North America’s leading lighting company, Acuity Brands, Inc. (NYSE:AYI), delivered another good set of results for its recent third quarter, and spoke about its markets picking up.The stock offers a ‘back door’ way to play the increasing usage of LEDs in lighting solutions.If you like the construction industry and energy-efficient lighting, then Acuity could be a stock for you. Its prospects look positive, but is that enough to justify its lofty valuation?

Acuity Brands’ secular growth drivers

The decreasing cost (per lumen) of LEDs means that Acuity can generate growth from LED lighting replacing conventional lighting. Margins on LED lighting are similar to conventional bulbs, but Acuity argues that it sells controls with virtually all its LED lights. Lighting controls are an essential part of the value proposition because, they help to increase the efficiency of lighting solutions.

The good news is that this is driving sales growth. Its net sales were up 11% in the third quarter, as opposed to the ‘low single digit growth rates’ that it claims its markets are growing at. The ‘bad’ news is that volumes grew by 14%. The discrepancy is due to lower prices of LED components and an unfavorable product mix. Essentially, Acuity Brands, Inc. (NYSE:AYI) is providing relatively more solutions to lower margin renovation work because large scale new construction hasn’t kicked in yet thanks to the slow economy.

Acuity’s LED-based revenue is now at 20% of its total, from 15% and 13% in the previous two quarters. This is a powerful trend.

For example, a company like Cree, Inc. (NASDAQ:CREE) is more of a pure LED play than Acuity. It offers a vertically integrated way to play growth in LEDs. Lighting looks set to be the primary driver of the next upswing in the LED cycle. Cree’s own lighting division managed to increase sales by 6% in the last quarter, even with unseasonal weather negatively affecting outdoor lighting sales.

Cree’s lighting products gross margins are at 30.6%, while Acuity Brands, Inc. (NYSE:AYI)’s numbers are at a more impressive 40.8%. Acuity has a more mature sales operation, while Cree uses sales agents. Nevertheless, Cree appears to have the opportunity to improve its lighting products margins going forward. Cree’s lighting product revenues currently represent nearly 38% of its total, so the opportunity is significant.

Cyclical growth drivers

Acuity can see cyclical growth in two ways. The first is from a general pickup in construction activity, and the second is through margin expansion, as more profitable activity like large-scale new construction takes place. Historically speaking, the former usually entails the latter.

In addition, investors need to appreciate that lighting is one of last phases of construction, so a natural time lag exists between general activity and orders coming in for lighting.

All eyes will be fixed on construction indicators such as the Architectural Billings Index (ABI) from the American Institute of Architects. It has been unusually volatile lately.

Page 1 of 2
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The Best B-Boy Movies

Most Awesome Hip Hop Documentaries

Foods That Stain Your Teeth

Richest Doctors in the World

The Best Movie Sountracks Ever

The Highest Grossing Musicals on Broadway

The Most Successful Reality TV Stars

Cheapest Cities to Visit in the US

Most Expensive Summer Camps

Most Expensive Animals in the World

Most Expensive Specialty Crops in the World

Movies That Took Ages to Make

The Longest Hollywood Films Ever Made

Most Expensive Concert Stages

The Richest Bands of all Time

10 Most Corrupt Countries 2013 List

10 Countries with the Highest Quality of Life Index

Most Expensive Mattresses in the World

5 Smallest Countries by Land Area

The Ultimate Heartbreak Songs

Richest Teenagers in the World

10 Most Haunted Places in America

10 Best Places to Retire in Florida East Coast

Top 10 Places to See Before You Die

Top 8 Countries in the World Where Justice Prevails

10 Richest States in America

15 Wealthiest Countries in the World

Richest Singers in the World

Most Expensive Tasting Menu in New York City

Most Expensive Baby Items in the World

Most Expensive Hotel Suites in Vegas

Most Expensive Brunch in New York City

Most Expensive Beef Cuts in the World

25 Best Colleges to Get a Job

Top 10 US Supermarkets

The 25 Most Dangerous Cities in the World to Visit

Most Expensive Xbox Games

Top 11 Cities Where Billionaires Live

Top 10 Most Charitable Companies in America

Most Expensive Seafood in the World

The 10 Wildest Conspiracy Theories

The 10 Best Job Markets in the US

Top 10 Accounting Scandals of All Time

The 25 Biggest Cities in the World

Top 10 Best Paying Virtual Jobs

Most Expensive Leather Shoes in the World

Top 6 Things to Buy in March

The 10 Most Stressful Jobs in America – 2014 List

Top 10 Jobs for Introverted People

Top 10 Honeymoon Destinations in the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!