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Acuity Brands' Focus on Innovation to Aid, Cost Woes Linger

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Acuity Brands, Inc.’s (AYI - Free Report) continued innovative solutions, cost-saving initiatives coupled with inorganic moves bode well. However, softness in the lighting industry, higher input costs and lack of skilled labor remain headwinds.

Consequently, the company’s shares have declined 37.7%, comparing favorably with the industry’s fall of 44.3% over a year.

Innovation to Drive Growth

Acuity Brands, a leading provider of lighting and asset management solutions, has a diversified portfolio of innovative lighting control solutions as well as energy-efficient luminaries. The company is consistently working on smart business strategies to achieve sustainable growth in sales and earnings.

Further, its Atrius-based IoT luminaires and solutions in the retail segment are leveling up to the industry standard. Moreover, the company is focused on expanding these solutions in other channels in the near future. It believes that the lighting and lighting-related industry, along with building automation systems will see growth over the next decade.

Notably, net sales of $1.06 billion grew 11% in the fourth quarter of fiscal 2018 primarily driven by volume growth in its Contractor Select portfolio, Atrius-enabled luminaires and Holophane solutions. Overall, the company saw solid growth in most channels during the quarter. Its geographies generated quarterly net sales in excess of $1 billion for the first time. Sales volume grew 13% year over year, backed by continued efforts to expand customer base, along with the introduction of products and solutions. Also, earnings increased 5% on a year-over-year basis to $2.68 per share in the quarter.

Cost-Saving Initiatives & Acquisitions Bode Well

The company has been increasing prices and reducing costs to offset higher input cost, as well as the impact of tariffs. It believes that the positive impact of price increases and other actions will offset the cost pressures midway through the first quarter of fiscal 2019, in turn driving margins in a positive direction.

Moreover, the company continues to expand its geographic borders and product portfolio through acquisitions and joint ventures. Notably, the company added 100 new product families in fiscal 2018, expanding its industry-leading portfolio. In fiscal 2018, the company spent $163 million in acquisitions, namely Lucid Design Group and IOTA Engineering. Moreover, in February 2018, the company acquired Lucid Design Group, a data and analytic platform, to facilitate data-driven decisions for improving building efficiency, as well as driving energy conservation and savings.


 

Concerns

Shipments of lighting fixtures were low in the United States during the fourth quarter of fiscal 2018. The sluggish trend for the demand of luminaries is expected to continue in the near term as well. In fact, the company remains cautiously optimistic for fiscal 2019. Per third-party forecasts and leading indicators, the North American lighting market is likely to increase in low-single digits in fiscal 2019.

Moreover, higher research and development costs may dent margins, and in turn the bottom line of the company. Again, commodity costs, especially steel prices, are increasing owing to the recently enacted tariffs. It believes that increased tariff may dampen the effect of the same on overall demand due to higher material costs and finished good prices, particularly of those made in China, with effect from Jan 1, 2019.

Further, a shortage of skilled labor may limit production. The labor market has tightened with limited availability, impairing production growth and impacting margins.

Zacks Rank & Stocks to Consider

Acuity Brands currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the Construction sector are Great Lakes Dredge & Dock Corporation (GLDD - Free Report) , Altair Engineering Inc. (ALTR - Free Report) and EMCOR Group, Inc. (EME - Free Report) . While Great Lakes sports a Zacks Rank #1 (Strong Buy), Altair Engineering and EMCOR both carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Great Lakes’ 2018 earnings are expected to increase 111.1%.

Altair Engineering has an expected earnings growth rate of 23.1% for the current year.

EMCOR has a projected earnings growth rate of 20% for the current year.

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