Credit: Shutterstock photoA cuity Brands, the designer and producer of innovative and energy-saving lighting products, continues to shine. The Atlanta-based company has strung together eight consecutive quarters of double-digit sales volume growth, benefiting from increasing use of its LED (light-emitting diode) products, mounting activity in construction markets and ongoing remodeling and retrofitting work.
It also pursued a strategic acquisition this year and has positioned itself to benefit, long term, from the developing wave of high-tech lighting adoption that's poised to help connect more homes, offices and other properties to the Internet of Things.
Acuity ( AYI ), which operates in residential, industrial and commercial markets, said in April that in its latest quarter earnings per share climbed 43% to $1.07.
"This is a company that has really been impressive," Brent Thielman, an analyst at D.A. Davidson, told IBD.
Net sales of $616.1 million were up 13%, Acuity reported for its fiscal 2015 second quarter, ended in February. The company said its LED product sales advanced more than 60% in the quarter from a year earlier and made up about 43% of total sales.
Growing New Bulbs
Acuity has established itself as a market leader in LED products, which have become increasingly popular largely because they require less energy and last longer than incandescent lights, saving customers money.
Acuity Senior Vice President Dan Smith said that, by the end of the current decade, LEDs could make up 85% of the overall lighting market. Acuity could grow LEDs to a similar percentage of its sales, meaning there is plenty of room for continued LED-driven expansion in coming years.
"The trend toward LED is sure to continue," he said in an interview.
Acuity stock is up nearly 30% this year. The company is in IBD's Building-Construction Products/Miscellaneous group, which ranks No. 10 out of 197 industries tracked.
Acuity holds a best-possible IBD Composite Rating of 99, and is the third-largest name by market cap in the group, afterMohawk Industries ( MHK ) andMasco ( MAS ), which are also highly rated. So is the next in size,Fortune Brands Home & Security ( FBHS ).
Acuity sells under several brands, such as Gotham, Holophane, Lithonia and Winona Lighting.
New condominiums and offices, Davidson's Thielman says, are likely to use LED technology, as are companies that expand or remodel a range of existing properties. Commercial and industrial building codes are progressively getting more strict, boosting construction costs and providing both companies and municipalities with an incentive to trim expenses elsewhere, notably including on lighting.
Such commercial work -- while uneven early this year because of harsh winter weather in many parts of the country -- is gaining steam this spring and is widely expected to pick up further this summer, Thielman says, citing anecdotal commentary from companies he covers.
"It's looking really good," said Thielman, who tracks several firms with large exposure to the commercial real estate and construction markets. "There's a very high degree of optimism out there. .. . There's a lot of activity across the country."
Commercial Real Estate Revs
Scott Brown, chief economist at Raymond James, told IBD that while big corporations accounted for a large share of commercial real estate activity in recent years, small businesses are beginning to gather momentum.
As these companies hire more substantially, he says, they likely will invest more in physical expansion that could help further drive commercial construction and remodeling work.
"The small-business outlook is still improving substantially," Brown said.
As commercial development continues, analysts say, LED use will advance even more.
A new report from Navigant Research notes that LED adoption is ramping up across all major end uses: commercial, residential and industrial buildings, as well as outdoor applications. Globally, Navigant forecasts, shipments of LED lamps and modules will grow from 864 million this year to more than 4.1 billion in 2024.
During Acuity's earnings call in April, Chairman and CEO Vernon Nagel told analysts that sales gains in the company's fiscal second quarter were "broad-based along most product lines." During the quarter, Nagel added, "We believe the North American lighting market was up mid-single digits," about half of Acuity's growth rate.
Nagel attributed the company's above-average performance in part to Acuity's vast product offerings -- some 1.7 million and steadily growing -- which he said outstrips all other lighting companies.
Roughly 90% of Acuity's customers are in nonresidential markets, Smith told IBD, but he said the company would like to push further on the residential side, particularly as housing markets heal. "We do think there is more opportunity there," Smith said.
He said the residential component would likely continue to make up a relatively small percentage of Acuity's overall business, but he said the company sees it growing alongside the commercial business and at least maintaining its current share of Acuity revenue, perhaps gaining a few percentage points.
Residential "is a big market and there's certainly lots of room for penetration there," Thielman said. But he said ultimately there is more opportunity for Acuity to sell multiple products in multiuse commercial buildings than in individual homes.
"There's just such a good profit margin to be had on the commercial side," he said.
Thielman and others anticipate that will be the case more and more as Acuity and others -- including competitorsPhilips ( PHG ) andEaton 's (ETN) Cooper Industries -- burrow into lighting that includes digital systems tied to the Internet of Things.
Lights Get Smart
Analysts say that demand for intelligent, digital lighting systems is only beginning to develop, and already Acuity is benefiting. Smart lighting systems, as they also are called, can communicate online with other systems to, for example, point customers to an open parking space at an office complex or help schools blend natural daylight with electric light to consistently optimize energy efficiency in classrooms.
Acuity in March ramped up its focus on this arena with the announced acquisition of Distech Controls, a provider of building automation and energy management products that integrate lighting with HVAC, access control, closed circuit television and other kinds of systems.
Jeffrey Osborne, a Cowen & Co. analyst, said in a May research note to clients that the Distech deal should help Acuity further sell multiple sets of products to commercial customers.
"Acuity will now be able to offer products that have integrated controls, automation, and data collection capabilities, which can allow for better energy management," he wrote.
"Ultimately," Osborne added, "this could lead to improved margins as well as future opportunities to capitalize on the growing trend of smart and connected products."
Acuity's Smith said the lighting industry's link to the Internet of Things "is still in its infancy," but he said it holds vast potential.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
