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Tickers in this Article: AYI, ZEP, CBE, HUB.B, HUB.A, PHG
In April 2008, I wrote an article entitled "Acuity's Narrow Focus Pays Off," asserting that lighting fixture leader Acuity Brands (NYSE:AYI) would continue to benefit from the spinoff of its specialty chemical business, Zep Inc. (NYSE:ZEP). What I didn't count on was deterioration in the non-residential construction industry, which generates approximately 85% of its overall revenue. At the time, management felt 2008 would be relatively strong with commercial construction continuing, albeit at a slightly slower pace. That didn't happen, dropping precipitously in the second half of the year. It's clear this is affecting both the top line and bottom line, leading me to question whether the lights went out in Georgia.

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The Pain Is Real
Net sales and operating income in the first quarter of 2009 were down 11% and 39% respectively, with sales of $452 million and operating income of $33.7 million. On a per share basis, this was a decline of 24 cents (33%) to 48 cents. According to the American Institute of Architects, non-residential construction will fall 11% in 2009 and 5% in 2010, applying downward pressure to its quarterly results for the foreseeable future. Add to this raw material cost increases between June and September in 2008 that reduced its first quarter gross profit by $17 million, and the second quarter gross profit by about $5 million; despite raw material cost decreases of 50% between September and December last year. (Take a deeper look at a company's profitability with the help of profit-margin ratios, read The Bottom Line On Margins.)

It's a miserable time for budgeting, that's for sure. At the end of the day, the company expects 2009 to be a down year, using productivity gains made over the last two years, to ensure the sales they do make are profitable. As BB&T analyst Matthew McCall put it, Acuity's first quarter was "a good company operating in a terrible part of the economic cycle." I couldn't agree more.

The Bright Side
Included in the first quarter results were expenses relating to its cost savings program that it initiated in 2008 to improve productivity. Removing this 34 cent charge ($22 million) as well as a $14 million expense for costs associated with the spinoff of Zep the year before, the true decline was 20%, much less damaging than the 39% in the income statement.

On an earnings per share (EPS) basis, the drop was only 12%, from 93 cents in Q1 2008 to 83 cents in Q1 2009. That's hardly a disaster given this economy. Also, it's important to point out that the last time Acuity produced sales of approximately $450 million in a quarter (Q3 2006), its operating margin was 8.2%, 400 basis points lower than in the latest three-month period. Cost savings initiatives should realize an additional $28 million in 2009, most of which will come in the second half of the year. Acuity seems to be much better prepared for a downturn in the economy than it was three years ago.

No Escaping the Damage
In my previous story I mentioned that Acuity and its three main competitors: Cooper Industries (NYSE:CBE), Hubbell Inc. (NYSE:HUB.A, HUB.B) and Royal Philips Electronic's (NYSE:PHG) Genlyte division, generate 54% of all commercial lighting sales in the U.S. None is immune from this downturn. In Hubbell's third quarter press release from October, its management suggested 2009 would be difficult due to the non-residential construction slowdown. At this point, it appears that all four companies lighting businesses will contract in 2009. With all four stocks down an average of 37.4% since the article's writing, I'd be looking at all four as potential investment candidates. (Economic indicators can have a huge impact on the market; learn more in our Economic Indicators Tutorial.)

Bottom Line
Since last April, it's beaten the S&P 500 by almost 2%. Down 36.5%, there's enough bad news already cooked into the price for you to give it serious consideration, especially if you're looking at holding for three to five years.


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