Acuity Brands (AYI), the lighting giant, reported fiscal third-quarter results this morning. On the surface, everything was basically in line. Revenues essentially matched Wall Street consensus, as LED sales and recent acquisitions propelled sales 25%, year over year. Operating leverage, in my mind, was a little light, though gross margins were solid and continued to expand on good product mix.
In general, the quarter was a continuation of trends over the last 12 quarters, where the company beat in 10 of them, again mostly on solid gross margins and sales in excess of expectations. Recent sales trends, however, may not prompt a continuation of rising expectations.
So what's my gripe? Call me stingy.
The lighting business is cyclical. On the call, Acuity's main end market, commercial construction, was termed "schizophrenic." LED sales, which now account for 60% of total revenue, were up 60% in the May quarter. But the shrinking core business was down 6% year over year. In the first conference call that we've listened to since "Brexit," the company took an opportunity to add that the recent developments in the U.K. and the EU created uncertainty in global economic activity.
Forecasts for earnings per share of $9.53 for fiscal year 2017 (ending May) are too high, in my opinion. A continuation of these trends appears unsustainable, despite solid execution by the Acuity team and smart "systems" M&A.
Overall, the stock is trading near all-time highs and well above any "normal" cyclical valuation. We will see "that" quarter, or two, or three, or 10, where cyclicality rears an ugly head. This will inevitably happen.
My gripe is this: The stock, at current levels, in no way respects the underlying cyclical characteristics of the end markets Acuity serves. And this, to me, is the biggest issue with it being a new money buy. In fact, I think it is a trading short.
A more reasonable valuation, still a premium, on numbers that reflect the cyclical nature of the business, shows 20% downside from current levels. At the very least, if long, lighten up. AYI is not a new money buy here.