The Lights Are Shining Brightly on This 52-Week High. Too Late to Buy?

Atlanta-based Acuity Brands (AYI) is a world leader in lighting and lighting controls for commercial and residential applications. I've been a company fan for years, recommending its stock several times. However, until its recent surge over the past year, its stock's performance has often been underwhelming. 

So, the fact that it hit a 52-week and all-time high of $303.04 on Tuesday makes me really happy for long-time shareholders. They can now boast that it has an annualized total return of 20.1% over the past three years, double the Morningstar U.S. Market Total Return Index (97% of the U.S. investable universe) over this period. 

It's been a long time coming. 

The questions to answer are three-fold:

1) How did Acuity get here?

2) Can it maintain momentum in 2025?

3) How to play AYI stock?

How Did Acuity Get Here?

Between fiscal 2015 (August year-end) and 2018, its sales increased yearly from $2.71 billion to $3.68 billion, while operating income plateaued at around $46 million. It then had a two-year lull in 2019 and 2020, followed by two years of revenue gains and a slight correction in both revenue and operating income over the next two years. 

Its revenues and operating income have 10-year compound annual growth rates of 4.0% and 3.9%, respectively. While that's not significant growth, it has been relatively stable, growing in more than 50% of those years.   

In recent years, its cash flow generation and growth have made it a stock worth owning. According to S&P Global Market Intelligence, its cash from operations was $408.7 million in August 2021. Three years later, at the end of this past August, it was $619.2 million, 52% higher. Its free cash flow in 2024 was $555 million, the highest in the past decade, for a free cash flow margin of 14.5%, 400 basis points higher than in 2021. 

Thanks to the growth in its free cash flow, it went from net debt of $66 million at the end of fiscal 2021 to net cash of $350 million as of Aug. 31.

That's how it got to $303. 04.   

Can It Maintain Momentum?  

If you go by the Barchart Technical Opinion of Strong Buy, the near-term prognosis looks good. It's the longer term that I'm worried about. Of the eight analysts that cover its stock, just three rate it a Buy (38%), below the 54.5% average for S&P 500 stocks as of Sept. 20. 

The analysts' median target for Acuity is $311.50, about 4% higher than where it's currently trading, but this is not a ringing endorsement for the next 12 months.

Based on the 2025 and 2026 earnings per share estimates of $16.75 and $18.06, respectively, its stock trades at 17.9x and 16.6x those estimates. Both multiples are higher than its five-year average forward P/E of 14.2x. 

So, at first glance, it doesn't appear that Acuity's stock has any more runway for growth. However, its Q4 2024 conference call did provide glimmers of hope.

Although the company operates two business segments, Acuity Brands Lighting and Lighting Controls (ABL) and Intelligent Spaces Group (ISG), the former accounts for 92% of its revenue, while ABL's revenues only increased by 1.1% in the fourth quarter, the unit's adjusted operating margin was 18%, 300 basis points higher than in fiscal 2020.

"In fiscal 2020, our adjusted operating profit margin was 15%. And now in fiscal 2024, it has increased to 18%. We are confident that we continue this trend and believe that we can add around 50 to 100 basis points of adjusted operating profit margin per year in the lighting business," CEO Neil Ashe stated in the fourth-quarter conference call. 

"We have made ABL more predictable, repeatable and scalable. It is a high-quality strategic asset and a core pillar of our company."

Based on these comments, it's not unreasonable to think that it will not be able to keep growing its free cash flow in 2025 and beyond. 

Beyond using free cash flow to pay down debt, the company has invested in the business in the past three years and made strategic, tuck-in acquisitions to make it more profitable. 

In addition, it has also repurchased its shares at reasonable prices, buying back $89 million in fiscal 2024, at an average price of $194. Based on its current price, that's a return on investment of 55%. Since the end of Q3 2020 through Q4 2024, it has repurchased $1.38 billion of its stock at an average price of $145, reducing its share count by 24%. 

Despite its share price appreciation over the past three years, it still has a free cash flow yield of 6.9% [$555 million in free cash flow divided by $8.02 billion]. I consider anything above 8% to be in value territory. 

So, I don't think Acuity's share price is overvalued by any means. 

How to Play Acuity Stock?

Whenever I see a stock that's had a big run, but I want to find a reasonable entry point, I look at options for a possible solution. Acuity is no different. 

As I write this, AYI doesn't have much unusual options activity. However, selling the Oct. 18 $290 put that's currently 3.4% out of the money looks interesting. 

With a bid price of $2.60, the annualized return is 19.8% and expires in 16 days. However, based on the last trade of $3.23, the annualized return is 24.6%. You wouldn’t lose money on the trade until it hits $286.77, and you're made to buy the shares. 

As I said in the intro, I've always liked this business, and now that it appears to be generating higher margins and free cash flow, I think it makes an excellent long-term hold. 

 

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.