Although Acuity Brands (currently trading at $298.23 per share) has gained 5.7% over the last six months, it has trailed the S&P 500’s 12.8% return during that period. This might have investors contemplating their next move.
Does this present a buying opportunity for AYI? Or does the price properly account for its business quality and fundamentals?
Why Does Acuity Brands Spark Debate?
One of the pioneers of smart lights, Acuity (NYSE: AYI) designs and manufactures light fixtures and building management systems used in various industries.
Two Things to Like:
1. Encouraging Short-Term Revenue Growth
Long-term growth is the most important, but within industrials, a stretched historical view may miss new industry trends or demand cycles. Acuity Brands’s annualized revenue growth of 9.9% over the last two years is above its five-year trend, suggesting its demand recently accelerated. 
2. Increasing Free Cash Flow Margin Juices Financials
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Acuity Brands’s margin expanded by 9.6 percentage points over the last five years. This is encouraging, and we can see it became a less capital-intensive business because its free cash flow profitability rose more than its operating profitability. Acuity Brands’s free cash flow margin for the trailing 12 months was 16.1%.
One Reason to Be Careful:
Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Acuity Brands’s revenue to rise by 3.7%, a deceleration versus its 6% annualized growth for the past five years. This projection is underwhelming and implies its products and services will face some demand challenges. At least the company is tracking well in other measures of financial health.
Final Judgment
Acuity Brands’s positive characteristics outweigh the negatives. With its shares trailing the market in recent months, the stock trades at 14.1× forward P/E (or $298.23 per share). Is now the time to initiate a position? See for yourself in our full research report, it’s free.
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