Atlanta-based Acuity Brands (NYSE:AYI) delivered better than expected Q3 earnings June 2 thanks to a greater focus on LED products along with a reduced reliance on new construction. The earnings surprise sent its stock up 7.2%. Now trading within 3% of its 52-week high; the question is whether it has any more room to run.
At $83.30, not only is it trading near a 52-week high, it's also trading near a five-year high as well as an all-time high. It's going where it's never been before which makes it very difficult to know whether it can continue its rock steady pace, up 20.6% year-to-date, 32.9% over the past year and 19.2% annually over the last 10 years.
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Acuity's history is a circuitous one filled with many acquisitions. Its former parent, National Service Industries, was a conglomerate that came to the forefront of American business in the 1960s although it began life as a linen supply company all the way back in 1919. By 1993 the conglomerate had four divisions including a lighting business, which had become its most important at NSI generating 38% of its overall revenue. Eight years later looking to increase shareholder value, it spun-off its lighting business on a 1-for-1 basis. Included in the "new" Acuity Brands was NSI's specialty products unit, Zep Inc. (NYSE:ZEP), which itself was spun-off in October 2007 on a 1-for-2 basis. A $10,000 investment in National Service Industries at the end of 2000 is worth $42,163 today. That's pretty good considering Zep's stock hasn't done a whole lot since its spin-off and NSI went bankrupt last year.
I wrote an article back in November 2011 in which I reasoned that Acuity was unfairly valued, trading 30% off its 52-week high while its peers, Cooper Industries, now part of Eaton Corp. (NYSE:ETN), and Hubbell Inc. (NYSE:HUB.B), were trading at just 20% their 52-week highs. For whatever reason, investors weren't giving Acuity its due and I thought this presented an opportunity. Since that article, Acuity's achieved a total return of 77% compared to 69% for Hubbell, 63% for Eaton and 39% for the SPDR S&P 500 (NYSEARCA:SPY). Today, all three competitors are trading within 5% of their 52-week highs.
From a valuation perspective Acuity is fairly valued compared to its historical norms. Its current P/E, P/B, P/S and P/CF are all higher today than its five-year average. Its PEG Payback period is 10.6 years, 13 months longer than Hubbell and 37 months longer than Eaton. By almost every metric it's not expressing any great value at these price levels. On the bright side, however, its enterprise value as a multiple of EBITDA is currently 12.5 times, considerably lower than Eaton's at 17.4 times.
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Furthermore, Acuity is outperforming the industry as a whole. In Q3, its revenue for LED solutions doubled delivering approximately 20% of its $542 million in sales. Benefiting from a rebounding housing market, its Q3 earnings were 97 cents per share, excluding special items, compared to the consensus estimate of 88 cents and 2012's Q3 result, which was 82 cents per share. It's clearly outperforming the overall growth rate for the North American lighting market as a whole.
Can it continue to do so?
I don't see why not. Acuity's working very hard to grow its business introducing lots of energy efficient lighting products to its end market customers. The company projects that its addressable North American market will grow by 50% to $18 billion over the next five years. By controlling costs, it's increasing both its gross profit margin and its operating profit margin resulting in much higher free cash flow. While it was improving it was improving its operating profit margin by 640 basis points between 2002 and 2012, the entire industry saw them shrink by 33%. It's lean and mean and ready to take more market share.
CEO Vernon Nagel said this about Acuity in its Q3 earnings release: "We believe the lighting and lighting-related industry will experience solid growth for the next decade, particularly as energy and environmental concerns come to the forefront, and we believe we are well-positioned to participate in this exciting industry."
I've liked Acuity a long time. Although fairly priced at this point, if you've got a long-term holding period, I'd definitely be buying. And yes, it does have more room to run.