Atlanta-based Acuity Brands (AYI) reported its Q4 2023 results Wednesday before the markets opened. The news from the lighting and building management specialist was reasonably good. Its shares are up more than 7% in late-day trading.
This is a company whose business has been under siege for a long time. Its stock has underperformed relative to the S&P 500 over the past five years, and its revenue continues to shrink.
However, today’s bounce has come with above-average share volume and options volume, suggesting it might be ready to run in 2024.
But is it the time to buy? I’ll dig into that question.
What Happened in 2023?
Let’s forget about the fourth quarter for a minute and focus on Acuity’s fiscal 2023, which ended on Aug. 31.
On the top line, its revenues were $3.95 billion, 1.3% lower than a year ago. In the middle of the income statement, its adjusted operating profit was $597.4 million, 1.6% higher than in fiscal 2022. As for its adjusted earnings per share, it earned $14.05, 9.5% higher than a year earlier.
And that, ladies and gentlemen, is why AYI jumped more than 6% on Wednesday.
For the full year, analysts expected EPS of $13.81 in 2023. It beat by 24 cents, or 1.7%. In Q4 2023, it earned $3.97 on an adjusted basis, 40 cents clear of the consensus estimate, an 11.2% beat on the year's final quarter. Compared to last year, EPS was two cents higher in the quarter, essentially flat year-over-year.
“Our fiscal fourth quarter performance demonstrated excellent execution. Our focus on margin and cash generation led to increased adjusted operating profit margin and higher adjusted diluted earnings per share, despite a decline in sales in the lighting business,” stated Neil Ashe, Chairman, President and Chief Executive Officer of Acuity Brands, Inc.
“This quarter concluded a successful year. We delivered strong financial performance, continued to improve our businesses and allocated capital effectively.”
Breaking down what the CEO said, its Q4 adjusted operating profit margin for Acuity Brands Lighting and Lighting Controls (ABL) -- which generates 94% of its revenue -- was 16.8%, 150 basis points higher over Q4 2022. For the entire year, the segment’s margin was 15.9%, 50 basis points higher than in 2022.
The Intelligent Spaces Group (ISG), which accounts for the remaining 6% of revenue, had a 130 basis point improvement in its adjusted operating profit for the year. However, in Q4 2023, it was 19.7%, 410 basis points lower.
The company’s overall margin for 2023 was 15.1%, 40 basis points higher. Yes, it was better, but barely.
As for cash generation, it generated $578.1 million in cash flow from operating activities, 83% higher than in 2022. Its free cash flow for 2023 was $511.4 million, 97% higher than a year ago. Free cash flow enabled it to pay out $16.8 million in dividends in 2023.
Thanks to share repurchases, it paid out less dividends -- $16.8 million compared to $18.1 million -- suggesting it could do with a dividend increase.
The Valuation Is Reasonable
Based on a market cap of $5.54 billion, it has a free cash flow yield of 9.2%. If you use enterprise value, which considers the entire capital structure, its free cash flow yield is 9.1%.
I consider anything over 8.0% to be in value territory.
As for its balance sheet, it has just $98 million in net debt, which represents less than 2% of its market cap. Given higher interest rates, it’s put itself in a very financially responsible position should a recession hit in early 2024.
It has a P/S ratio of 1.35, the lowest multiple since 2018 and the second-lowest over the past decade. According to Morningstar, its earnings yield (the inverse of P/E) is 6.90%, the highest since 2018.
So, what kind of shape was the business in 2018?
Revenues were $3.68 billion, up 5% from fiscal 2017. Its operating profit was $454.6 million, a 12.4% operating margin. On an adjusted basis, the margin was 14.5%, down 390 basis points from 2017, similar to today's margins.
What does that tell investors?
While the company has a solid balance sheet, it’s had a hard time growing its revenues and profitability over the past five years.
However, the results from the latest quarter provide hope that it can get to the high teens margin-wise in 2024. If it does that, there is no doubt that its valuation multiples will increase from their low levels currently.
Is it time to buy?
I would be hesitant to go all in on a full position. However, consider a call or put with an expiration 6-9 months out that gives you time to assess whether the latest results were a head fake or the beginning of a trend higher.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
