Acuity Brands, Inc.’s (AYI - Free Report) shares have been declining for the past six months. The stock has lost 15.8% in the said period, comparing unfavorably with the industry’s 15.7% decline. The underperformance was caused by soft earnings performance and weak industry prospects.
Recently, the company reported weak fourth-quarter fiscal 2019 results. Both top and bottom lines missed the Zacks Consensus Estimates by 8.8% and 1.1%, respectively. On a year-over-year basis, the company’s revenues declined 11.6%, while earnings grew just 2.6%. The company witnessed lower volumes, which mainly resulted from the prior year’s shift in sales among key customers within the retail channel, elimination of a few products and soft market conditions.
Earnings estimates for fiscal 2020 have declined 1.1% over the past seven days, which is a concern for the company’s growth prospects. The innate weakness of Acuity Brands is further ascertained by its Zacks Rank #5 (Strong Sell).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Let’s delve deeper and identify the factors affecting its performance.
Lackluster Performance & Bleak Views: In fiscal 2019, Acuity Brands revenues declined 0.2% year over year, due to significantly lower volumes. Adjusted gross margin contracted 20 basis points (bps) due to inflationary pressure, the U.S.- China trade war and increased tariffs. While the adjusted selling, distribution and administrative expenses were stable on the back of various cost-saving actions, the adjusted operating margin was under pressure, contracting 10 bps year over year.
Management does not expect any considerable rebound in luminaries' near-term demand. It remains cautiously optimistic for fiscal 2020 due to the escalating trade-war tensions. For fiscal first-quarter 2020, it projects net sales to decline year over year in the mid-to-high-single-digit range.
Weakness in the Industry: Acuity Brands operates in a highly competitive industry, which is affected by volatility in the general economic factors like GDP growth, employment levels, credit availability, energy costs and commodity costs. Its business is based on residential and non-residential construction, which is highly sensitive to the above-mentioned factors.
Additionally, its products are majorly sold through various retail channels, which are highly sensitive to consumer spending and discretionary income along with construction spending. Moreover, the overall lighting industry is experiencing a tough time in the North American market as well as Europe and Asia.
Current market conditions in the lighting industry continue to create a challenging environment for Acuity Brands, and other companies like LSI Industries Inc. (LYTS - Free Report) , Orion Energy Systems, Inc. (OESX - Free Report) and Energy Focus, Inc. (EFOI - Free Report) .
Higher Costs: Acuity Brands belongs to a highly fragmented industry, where ever-changing technology and innovation play vital roles in the competitive landscape. Energy-efficient lighting products like LED fixtures need extensive research and development and hence involve excessive costs. Higher spending on research and development poses a threat to the company’s bottom-line performance.
Again, a shortage of skilled labor and higher input costs in electronic and certain oil-based components along with rising steel prices are pressing concerns.
Estimates Trending Downward: Earnings estimates for the fiscal first quarter have declined 2.2% over the past seven days. Notably, the Zacks Consensus Estimates for fiscal first-quarter earnings is currently pegged at $2.25 per share, indicating a decrease of 3% year over year. Revenues are currently expected to fall 7.5% from the year-ago quarter’s $932.6 million.
Overvalued Compared to Peers: The company’s stretched valuation is another concern. Its trailing 12-month price to earnings (P/E) ratio is 13.18, which is higher than the industry’s 11.6. This implies that the stock is overvalued compared to its peers.
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