What an absolute home run Acuity Brands (AYI) has been. At times earlier in my career, this left-for-dead lighting leader traded in the $30 to $50 range for a long, long time. Investors would complain about competition and cyclicality. The stock would be the standard "neutral" on only a few sell-side coverage lists.
Now look at it. She's all grown up. Earnings been growing like a weed and little old Acuity has become the "must own" name in the electrical infrastructure space. Acuity has unseated the Eaton (ETN) growth story after Cooper Industries was acquired in 2012. Hubbell (HUBB) and Littelfuse (LFUS), still loved by many, are just not as widely held as Acuity among the largest and most fickle part of the market -- those investors looking for hyper-earnings growth.
The company is sporting a fancy $10 billion market capitalization and an even more impressive price/earnings multiple of 32x the 2016 adjusted earnings-per-share estimate of $7.97. Consensus EPS estimates of $9.48 in fiscal 2017 forecast a continuation of 20% growth; just last quarter, these earnings estimates were 30 cents lower for fiscal 2016 and 40 cents lower for fiscal 2017. Expectations continue to rise along with the shares. Earnings per share are more than double that of 2014, and the stock has nearly tripled.
The fundamentals of the lighting industry are clearly favorable.
However, I am constantly on the lookout for companies, of good or bad quality, that are trading at levels that may not be sustainable. I have found this process, with patience, to be a fruitful way to hedge my portfolio instead of using market instruments.
AYI reached an all-time high of $264 recently. The stock in mid-February visited $168 at this year's low. We regularly hear pretty boilerplate comments from CEO Vernon Nagel on quarter earnings conference calls. An example:
"Further, we continue to see signs that give us optimism regarding the longer-term future growth of the markets we serve in our business. Leading indicators for the North American market such as Architecture Billing Index, vacancy rates, office absorption and lending availability and favorable employment trends continue to improve, though never in an absolute straight line, while residential construction continues to grow nicely."
The "straight line" comment acts as an alert for me. It is a reminder that Acuity's business has cyclical elements to it. These may not be apparent in recent earnings results, which handily have beaten expectations and prompted meaningfully higher revisions to near-term consensus forecasts.
Look, Acuity has been executing at a very high level, but when trees start growing to the sky, I start getting a little nervous. We'll learn more when the company reports earnings later this month.