JMP On Acuity Brands: 'Reasonable Valuation Based On Reasonable Expectations'

Acuity Brands, Inc. AYI reported mixed earnings Wednesday and downbeat guidance, but the stock is now trading at a reasonable valuation, according to JMP Securities.

The Analyst

Analyst Joseph Osha upgraded Acuity Brands' stock rating from Market Perform to Market Outperform with a new $150 price target.

The Thesis

Acuity Brands' earnings report made it clear the company faces multiple challenges, including weak pricing in the lower value-added segments, Osha said in a Thursday note.

The 4-percent decline in pricing seen in the quarter is the worst in years, but when faced with the option of ceding market share or becoming aggressive on price, Acuity was wise to maintain its competitive position at the expense of short-term profits, the analyst said.

Operating margins fell from 13.4 percent a year ago to 10.6 percent, and EBITDA margin fell from 16.8 percent to 13.9 percent over the same time period, Osha said. While it could take some time for margins to recover, investors should remember that Acuity is earning money at a time when its smaller competitors are not. Over the longer term, this could make Acuity a "beneficiary of the coming industry shakeout," the analyst said.

From a valuation standpoint, Acuity Brands' stock is trading at a "reasonable valuation based on reasonable expectations," Osha said.

JMP's $150 price target is based on 12x NTM EBITDA and 20x NTM free cash flow multiples.

"Investors need to balance Acuity's somewhat higher growth profile and the potential for competitive consolidation on one hand with the still-unpredictable nature of lighting and low dividend yield on the other," Osha said.