With the FOMC on track to cut rates in the back half of the year and the average 30-year rate already below 7.5%, the building market will stabilize and return to growth, which is good news for names like Acuity Brands, Inc. (NYSE: AYI). Acuity Brands has business in all construction industry segments and is well-positioned to take advantage of the change. That positioning is reflected in the stock price, which entered an uptrend in Q4 2023.
The uptrend is set to continue following the FQ1 earnings release. The release included some mixed results, but one thing is clear. The business is stabilizing in alignment with the pre-pandemic period, with margins improving and growth in the forecast. Assuming the next few earnings releases play out as expected, this stock should be able to set a multi-year high in 2024.
Acuity Brands has a stable quarter; margins widen
Acuity Brands had a mixed quarter concerning the Marketbeat.com analysts' consensus estimates. The takeaway is that mixed results mean revenue came in as expected at -6.3% YOY, with margins widening significantly. Revenue was driven by a 7.5% decrease in the core ABL segment, offset by a 13% increase in the ISG segment. The ISG segment is focused on smart buildings and includes IoT, cloud and AI-connected capabilities, so it is not surprising to see it perform well. This segment should continue to see improving demand as the technologies advance.
Margin is the report's highlight, widening by 200 to 300 basis points at all levels. The critical details are that operating and adjusted operating profits increased by 22% and 10%, respectively, to generate growth on the bottom line. The adjusted earnings came in at $3.72, up 13.1% YOY and nearly $0.50 better than expected, with strength expected to persist through 2024.
Acuity Brands doesn’t give guidance, but the outlook favors higher share prices. The analysts expect the company to improve sequentially on the top and bottom lines, returning to growth by mid-year. The FY 2024 consensus expects only a 2% top-line decline, with top and bottom-line growth projected for 2025. Marketbeat.com has yet to pick up any revisions to the outlook, but they are sure to come.
Analysts' sentiment will be a factor in the stock price in 2024. The market is up 5% following the Q1 release, trading well above the consensus price target. That said, the consensus sentiment is Moderate Buy with a price target trending higher. The most recent update set the high price target in mid-December 2024, which implies that an upside of about 10% to 15% is still possible. Coincidentally, the institutions bought AYI stock on balance every quarter of 2023.
Shining the light on Acuity Brands' capital returns
Acuity Brands pays a dividend but is small among housing stocks and has little expectation for growth. The company hasn’t altered its payment in 16 years and has not indicated doing so recently. However, the company does repurchase shares in a significant quantity. The Q1 repurchases annualized to a 3.2% yield and may be expected to continue. The share count is down more than 4% YOY, aiding shareholder value, and the balance sheet is solid, with debt-to-equity running below 0.25X.
The price action in AYI stock spiked more than 5% following the Q1 release. The move continues the trend begun in 2023 and has the market on track to retest resistance at the multi-year high. A sustained rally may form if the market can get above that level, but there is risk. The outlook is brightening, but FOMC rate cuts may not come soon enough. In that scenario, Acuity Brands stock could become range-bound until later in the year.
