Volatile Acuity Brands Looks 'Unusually Cheap,' Analyst Says

Lighting company Acuity Brands, Inc. AYI could close its valuation gap with its peers, according to JMP Securities. 

The Analyst

JMP Securities analyst Joseph Osha has a Market Perform rating for Acuity Brands. Although JMP has no assigned price target for the stock, the analyst said shares could potentially move to the $180-$190 range.

The Thesis

Notwithstanding long-term challenges, Acuity Brands stock looks unusually cheap, Osha said in a note. (See the analyst's track record here.) 

With the stock trading at a discount to its peers and the company's business entering a seasonally stronger period, the analyst sees the valuation gap closing. 

Acuity's business is "not as good as the market seemed to expect prior to the most recent report," but isn't as bad as the valuation would suggest, the analyst said. Osha said he sees a near-term trading opportunity.

The company's calendar year third-quarter GAAP operating margin fell from 15.9 percent to 14.1 percent despite a 12-percent sequential drop in revenues. And Acuity managed to generate free cash flow of $130 million, according to JMP. 

" ... We now regard the current 10.5 times calendar year 2018 EV/EBITDA multiple and 16.6 times free cash flow multiple at the low end of the fairly traded range," Osha said. This is remarkable considering a group of industrial comps that are now at 13 times EV/EBITDA, he said. 

The Price Action

Over the past year, Acuity Brands shares have shed over 25 percent.

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