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Here's Why Investors Should Steer Clear of Acuity Brands

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In the past six months, Acuity Brands, Inc.’s (AYI - Free Report) shares have dipped 2.3%, underperforming its industry’s 1.6% decline. The downside was caused by soft earnings performance and weak industry prospects. The company has been witnessing lower volumes, which mainly resulted from the prior year’s shift in sales among key customers within the retail channel, the elimination of a few products and soft market conditions.

Notably, the company remains cautiously optimistic for fiscal 2020. Earnings estimates for fiscal 2020 have declined 0.1% over the past 30 days, which is concerning for its growth prospects.

The weakness of Acuity Brands is further ascertained by its Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Weak Lighting Industry Prospects

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. Notably, its business is based on residential and non-residential construction, which is highly sensitive to the above-mentioned factors.

Moreover, the overall lighting industry is experiencing a tough time in the North American markets 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, Orion Energy Systems, Inc OESX and Energy Focus, Inc EFOI.

Acuity Brands continues to expect sluggish market demand for lighting products in fiscal 2020. Moreover, the company remains cautiously optimistic for fiscal 2020 on the ongoing U.S.-China trade tensions and higher tariffs.

Higher Costs & Expenses

Acuity Brands manufactures and distributes lighting fixtures and related components such as luminaires, lighting controls and controllers to optimize energy efficiency and comfort for various indoor and outdoor applications.

Energy-efficient lighting fixtures need extensive research and development, therefore involve high costs. Higher spending on research and development may dent the company’s margins.

A shortage of skilled labor, higher commodity costs, especially steel prices, and uncertainty related to infrastructure spending, federal regulatory and trade policies will likely remain concerning in the upcoming quarters as well. The company believes that increased tariffs could dampen the effect on overall demand due to higher material costs and finished goods’ prices, particularly of those made in China. Higher input costs in electronic and certain oil-based components along with steel prices are raising concerns.

Acuity Brands Vs Industry Scorecard

The Zacks Consensus Estimates for fiscal 2020 earnings is currently pegged at $9.75 per share, which reflects just 1.9% growth from the year-ago reported figure. However, the industry’s average growth is 12.2% for the same period. Meanwhile, revenues for fiscal 2020 are expected to decline 0.9% to $3.64 billion.

In three to five years, the company is expected to generate earnings growth of 10.5% compared with the industry’s average rise of 17.8%.

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