Acuity Brands, Inc. (NYSE: AYI) is a leading provider of lighting and building management solutions for commercial, industrial, infrastructure, and residential applications throughout North America and some international markets. Individual devices they sell include luminaires, lighting controls, lighting components, controllers for environmental systems such as HVAC, lighting, shades, power supplies, and directed natural skylights. These intelligent network systems optimize energy efficiency while providing a comfortable environment (both indoor and outdoor), to reducing operating costs. The Company is developing a software and services capability for data analytics that enables the “Internet of Things” (“IoT”). The ultimate objective and supports the advancement of smart buildings, smart cities, and the smart grid. In the last 12 months, the company generated profits of 304 million ($6.92/share) on $3.4 billion in revenue
Acuity Brands has grown nicely since the financial crisis, by using technology to help companies and families control their work and living environments. Unfortunately, it looks like that growth may be coming to an end. Back in August of 2016, analysts started to cut their earnings expectation from a peak of about $9.00 a share to about $8.73. This may not seem like very much, but institutional investors are beginning to show concern. The chart below shows that the share price has broken below the trend line that has shown support since the end of the financial crisis. When the price action speaks, it often pays to listen.
If growth is indeed slowing or coming to a halt, valuation is supportive of the bearish case. The shares are priced at a PE of 29 based of trailing earnings and 20 based on analyst’s expectations of next year’s earnings. The company will be reporting earnings on or about April 4, and we think they will hit expectations but will confirm analysts less optimistic expectations and disappoint on guidance. In addition, EV/EBITDA is ok at 15 for a manufacturing company that is growing but elevated for a company that is not. In addition, one might think that this company would benefit from an infrastructure construction boom, particularly a rebuild of airports, train stations, and government buildings. But curiously the share price shrugged off this potential business. This is one of the few stocks that trade lower since the election.
In the final analysis, we think AYI is a good company, but its stock is probably overvalued and vulnerable to a repricing. If you own the stock we suggest your sell it or buy a put for downside protection. If you would like to take advantage of a sharp drop in price on an earnings disappointment, we suggest you consider buying a put spread. With the stock trading at $202.34, we recommend the following structure.
| Action | Quantity | Exp. Date | Strike | Type | Net |
| Buy | 1 | 5/19/17 | $200.00 | Put | $8.30 |
| Sell | 1 | 5/19/17 | $185.00 | Put | -$3.90 |
| $4.40 |
To initiate this trade, the investor will pay $440 up front per put-spread. The breakeven level is $195.60, which is 3.3% below the current price. The efficient market hypothesis suggests there is a 42% chance of success on this trade. The most one can lose on the trade is the $440 premium paid up front and one has the potential to make $1060 if we are right and the share price falls to $185 or lower by expiration, which is 8.5% below the current share price.
