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Tickers in this Article: AYI, PHG, SI, CREE, GE, CBE, DD, HD, LOW, HUB.A, SNE
There are plenty of reasons the lighting market should be a little dim these days. Residential construction activity is almost nonexistent in many major markets, Home Depot (NYSE:HD) and Lowe's (NYSE:LOW) are not seeing much renovation demand, and commercial real estate is scarcely better. On top of that, customers have other pressing financial obligations that take precedence over swapping out inefficient lighting fixtures, and many consumers are resisting the mandatory switch away from incandescent lights.

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So with Philips (NYSE:PHG) already forecasting a bad quarter from lighting, Siemens (NYSE:SI) backing that up and Cree (Nasdaq:CREE) struggling mightily, it would only make sense for Acuity Brands (NYSE:AYI), the No.1 lightning equipment company in North America, to be struggling as well.

Third Quarter Results Not As Bad As Feared

Given the gloomy guidance from Philips and Siemens, Acuity actually seemed to do quite well this quarter. Revenue was up 12% (up 9% on an organic basis) and nearly matched the high-end estimate on the Street. Growth was boosted by volume (up 5%), and the company seems to be succeeding in pushing through price increases.

Profitability was a bit more mixed. Gross margin did improve by 130 basis points, but the company did not deliver the sort of operating leverage that analysts were expecting. Consequently, while operating income did jump 28% and operating margin improved about 140 basis points, the company still narrowly missed the earnings target for the quarter - an arguably worse development given the revenue beat.

Not Much Cause for Immediate Optimism

While Acuity had a decent third quarter, management did seem skeptical about market conditions in the next quarter and for the remainder of calendar 2011. This caution would seem to be well-placed. Data on commercial real estate from Reis suggests only very modest improvement, and there is really no tangible sign in the residential market that a building rebound is about to begin anytime soon.

Even granting that Philips and Siemens are more heavily weighted to Europe than North America (only about one-quarter of Philips' sales are in North America), this is a tough backdrop. General Electric (NYSE:GE) is not abundantly optimistic about near-term conditions in lighting either, and it seems to be spending more time on stripping costs out of existing technology in lieu of really pushing cutting-edge products.

Interestingly, investors are not too down on this space. Acuity trades at about 10% off its 52-week high, and Cooper (NYSE:CBE) and Hubbell (NYSE:HUB.A), which are diversified beyond lighting, are about 20% off their highs, and estimates have been moving higher.

The Bottom Line

For a company that serves markets that are facing some pretty serious challenges, Acuity's stock has been surprisingly strong. Of course, these issues in the residential and commercial markets are probably transitory, and there is a big market opportunity as companies transition to new lighting technologies. What remains to be seen, though, is how much Acuity can benefit from new solid-state technologies from companies like DuPont (NYSE:DD), Sony (NYSE:SNE) and Samsung, and to what extent potential suppliers will become competitors (or vice versa).

Though this is a good company, Acuity is a middling stock right now. It seems as though the market already expects that eventual rebound and conversion cycle, and there does not seem to be a gross degree of undervaluation here today. (For more, see Use Breakup Value To Find Undervalued Companies.)

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