Lighting firm Acuity Brands (NYSE:AYI) disappointed investors by reporting lower than expected profits during its second quarter. The earnings miss sent the stock down sharply, but not by enough to consider the stock a bona fide buy at current levels.
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Second Quarter Recap
Sales advanced 10% to $457.7 million. Acuity detailed that five percentage points of the growth stemmed from higher volume, 2% came from acquisitions and the remaining 3% resulted from more favorable pricing and product mix. Acuity's business consists of selling lighting systems that include brand names such as Hydrel, Gotham and Winona. It sells through distributors, lighting showrooms and home improvement centers such as Lowe's (NYSE:LOW) and Home Depot (NYSE:HD). Home Depot is its largest customer at roughly 10% of sales.
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Reported operating profits improved 4.8% to $39 million but included a special charge of $6.6 million, primarily due to tough operating conditions in Spain. This resulted in a slight 2% decline in reported net income to $19.5 million, but earnings improved a penny to 46 cents per diluted share because of share buybacks. On a recurring basis, management estimated that profits jumped almost 27% to 57 cents per diluted share.
Outlook and Valuation
Acuity held off on giving specific sales or profit guidance in the earnings press release but did mention it anticipates outperforming total lighting market growth that should come in at the low to mid-single digits for the rest of its fiscal year. Analysts currently anticipate sales growth of about 8%, total sales of close to $2 billion and earnings of $3.03 per share.
At the current share price of $54, Acuity trades at a forward P/E just about 15. Last year, free cash flow came in at $139 million, or approximately $3.25 per diluted share. This equates to a trailing free cash flow multiple at just below 18.
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The Bottom Line
Acuity's stock fell by more than 10% following the earnings release as it missed analyst's quarterly profit expectations amid higher than expected costs. Despite the fall, the earnings and cash flow multiples remain rather lofty given Acuity is struggling to grow. The credit crisis and simultaneous housing crash have clearly hit the residential construction market that Acuity serves, and government-related work has also slowed as tax revenues have decreased. Rivals including Phillips Electronics (NYSE:PHG) and Cooper Industries (NYSE:CBE) have also been slow to recover.
As a result, investors would likely be better off waiting for a lower entry point or until growth trends pick up at Acuity.
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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.