Shares of Acuity Brands (AYI) are getting hit this morning, currently down about 6%, after the company issued its Q4 results and provided a guarded outlook for its next few quarters. It has been a rough ride for AYI overall this year, with the stock down about 32% in 2017. As we discuss in more detail below, decelerating topline growth rates, combined with some sizable misses relative to consensus estimates, has plagued the stock.
For those unfamiliar with AYI, the company is a manufacturer of lighting products for the commercial, institutional, industrial, infrastructure, and residential markets in North America and internationally. It sells and distributes many different products, but, here is a quick sampling:
- For indoor, it sells decorative lighting for single family homes, commercial lighting, such as recessed and wraparound lights, emergency lighting and exit signs, track lighting, and modular wiring to re-locate lighting.
- For outdoor, it offers area and site lighting for illuminating parking lots, garage and canopy lighting, lighting for roads and infrastructure, sports lighting, and underwater lighting.
AYI markets many more types of products, but, this should provide a good view of what the company does and what its end markets are.
Looking at its Q4 results, EPS came in at $2.55, which easily topped the $2.43 consensus expectation. What mainly drove the upside result here was a 250 basis point reduction in selling, distribution, and administrative costs. This led to a 150 basis point improvement in operating profit margin to a record of 18.4%. That is the good news.
The not-so-good news is that revenue badly missed the mark. Specifically, revenue was up a pedestrian 3.5% to $957.6 million, well below the $975.05 million expectation. Furthermore, the 3.5% growth matched its performance in Q2, which was its weakest growth rate since 1Q11. Overall, the trend has not been positive, going back to 2Q16 (+26%): 3Q16 (24.5%) ... 4Q16 (21.9%) ... 1Q17 (15.6%) ... 2Q17 (3.5%) ... 3Q17 (4.7%) ... and 4Q17 (3.5%). In its earnings press release, management commented that industry data indicates that its key markets in North America were flat to slightly down, essentially inline with recent quarters. Also, an unfavorable product mix shaved about 1% off of its growth rate.
Unfortunately, AYI doesn't expect conditions to improve too much in the near term. While it is bullish on its future overall, the company commented that it does not expect a meaningful rebound in its end markets over the next few quarters. It cited a few different headwinds, including labor shortages in the construction market, uncertainty regarding infrastructure spending and tax policies, as well as some short term volatility due to the hurricanes in Texas and Florida. More specifically, it says it is expecting to generate revenue growth of low single digits in FY18, with the expectation for a rebound in the second half of the year.
Given its soft topline growth and its cautious outlook, AYI is clearly battling a challenging environment. The good news, however, is that management has set a low bar to hurdle for the upcoming year. Investors will not be expecting too much from the company going forward, so any outperformance could provide a boost to the stock. And lastly, from a technical standpoint, the stock has (at least as of this report) held support at the $160 mark as buyers have stepped in to pick up shares on the weakness.