Here's Why You Should Hold on to Acuity Brands Stock Now

Acuity Brands, Inc.’s AYI innovative lighting control solutions and energy-efficient luminaries are substantial growth drivers. Also, its strategic buyouts and cost-control efforts bode well. Notably, in third-quarter fiscal 2019, both the top and bottom lines performed well on the back of increased volume, higher price realization, along with productivity gains.

Shares of Acuity Brands have gained 5.3% compared with its industry's 6.1% growth in the year-to-date period. Estimates for fiscal 2019 have increased 1.1% in the past 60 days, reflecting optimism surrounding the company’s earnings growth potential. Notably, its earnings surpassed the Zacks Consensus Estimate in each of the trailing five quarters.

However, higher material and freight costs, lack of skilled labor, along with weakness in the lightening industry raise concerns.

Let’s delve deeper into factors that substantiate its Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Factors Driving Growth

Product innovation is a key growth strategy of Acuity Brands. The company keeps on expanding its portfolio of innovative lighting control solutions and energy-efficient luminaries through the introduction of new products. In fiscal 2018, the company introduced nearly 100 product families to its industry-leading portfolio. Notably, Acuity Brands’ Atrius-based IoT luminaires and solutions in the retail sector are becoming the industry standard.

The company believes that the lighting and lighting-related industry, and automation systems have solid growth potential over the next decade, particularly as energy and environmental concerns come to the forefront along with emerging opportunities for digital lighting are likely to play a key role in the IoT.

The innovation strategy is significantly boosting the company’s performance and aiding in portfolio expansion. In order to expand geographic borders and product portfolio, Acuity Brands adds businesses through acquisitions and joint ventures. On that note, the company acquired WhiteOptics, L.L.C. on Jun 20. Based in New Castle, DE, WhiteOptics manufactures advanced optical components that will enhance Acuity Brands’ optical materials offering, thereby boosting its commercial and architectural products’ performance.

Acuity Brands has undertaken various cost-saving actions that are expected to improve margins. The company has raised prices in order to offset the negative impact of higher material cost, which mainly stemmed from inflationary effects and tariffs.

Notably, in the fiscal third quarter, adjusted selling, distribution and administrative or SD&A expenses improved 90 basis points (bps) from the year-ago period, backed by a decrease in freight and commission expense. The company believes that the positive impact of price increases and other actions will offset the cost pressures going forward.

Major Concerns

Energy-efficient luminaries and innovative lighting control solutions require regular research and development, and hence involve costs. In the fiscal third quarter, adjusted operating margin was down 220 bps year over year. Moreover, increasing material and labor costs are hampering its margins. A shortage of skilled labor may limit production. Again, its commodity costs — especially steel prices — are increasing due to the recently enacted tariffs.

Current market conditions in the lighting industry continue to create a challenging environment for Acuity Brands, and other companies like LSI Industries Inc. LYTS, Orion Energy Systems, Inc. OESX and Energy Focus, Inc. EFOI. Although the U.S. lighting market’s overall growth rate improved slightly in the fiscal third quarter than the previous three quarters, it still declined in low-single digits year over year.

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