Goldman Sachs: Acuity Brands' Risk-Reward Profile Has Turned Unfavorable

Lighting manufacturing company Acuity Brands, Inc. AYI is likely to see a challenging environment going forward, according to Goldman Sachs.

The Analyst

Analyst Brian Lee downgraded Acuity Brands from Neutral to Sell and lowered the price target from $132 to $126.

The revised price target represents 20-percent downside from current levels compared to the 3-percent average upside across Goldman's coverage.

The Thesis

The negative view on Acuity Brands is based on three margin risk issues: mix, costs and pricing power, Lee said in the Tuesday downgrade note. (See his track record here.)

The challenges are not reflected in consensus estimates, the analyst said.

The mix and peso that benefited the company during this cycle will reverse or moderate in the next one to two years, Lee said.

The faster adoption in higher-priced markets such as outdoor and industrial suggests the mix is shifting to lower prices and potentially lower-margin markets such as residential and commercial, he said.

"We also believe that the overall pace of adoption for LED lighting moving forward is set to moderate."

Goldman Sachs sees the structural slowdown in industry growth and the likelihood of Acuity facing margin and earnings headwinds in the coming quarter as downside risks for the stock.

The outperformance in the company's shares over the past three months relative to the S&P 500 Index as well as the Industrial Select Sector SPDR Fund XLI has created an unfavorable risk-reward profile, Lee said.