Acuity Brands (AYI) Stock: Tariff, demand woes call for caution

Acuity Brands’ (NYSE: AYI) stock dropped to a six-year low last month, continuing the downtrend that began after the company published unimpressive results for the first quarter. The lighting solutions provider has been going through a difficult phase due to unfavorable market conditions, mainly the recent hike in tariffs that rendered certain categories of the business unprofitable.

Related: Acuity Brands Q1 2020 Earnings Conference Call Transcript

The company expects most of the challenges it faced in 2019 to persist this year, which could be a concern for shareholders. With trade-related tensions not easing, there will be continued softness in the demand for lighting products. In short, Neil Ashe, the new CEO who assumed office earlier this year, has a tough task at hand. Meanwhile, experts are of the view that conditions in the lighting market might improve in the second half.

In order to tap the opportunity, the management needs to execute the growth initiatives announced earlier, with focus on driving margin growth through effective product/price mix and cost management.

Low Price

Currently, the stock is at a multi-year low, making if affordable to more investors than before. At $130, the average target price set my analysts suggests that Acuity Brand’s market value is set to grow by a quarter in the 12-month period.

In the first quarter, the top-line benefited from contributions from the businesses acquired last year, including The Luminaires Group and LocusLabs. With more strategic acquisitions and investments in the pipeline, the company seems to be on track to meet its long-term growth targets, which include outperforming the key markets and channels it serves.

The Pros

The healthy order backlogs with core customers should catalyze top-line growth in the coming quarters. Also, the availability of liquidity, reflecting the positive cash flow, will help the company in pursuing its investment goals. That, combined with the strong fundamentals and sustainable debt, makes Acuity Brands an investment option worth considering, if investors are okay with the short-term risks.

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Recent studies have shown that the global smart lighting industry is poised for substantial growth in the next five years. It is good news for Acuity Brands, which is a leading player in that segment.

Looking Back

In the first quarter of 2020, earnings declined to $2.13 per share, hurt by an 11% dip in revenues, due to an unfavorable product mix. The stock has been on a losing spree, falling about 27% so far this year.

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