Acuity Brands Has A Bright Future Due To Smart Lighting Orders

CLSA analysts believe Acuity Brands, Inc. AYI has a solid future citing Smart Light Orders. Their comments come on the heels of the company's third quarter results beating the expectations on 25 percent year-over-year growth in sales apart from 1.4 percentage point improvements in operating margins.

The brokerage maintained its Outperform rating and $270 price target on shares.

CLSA thinks Acuity Brands is confident about the profitable growth outlook to be driven by continued success with advanced solutions. The brokerage pointed out the networked lighting systems expanded 40 percent year-over-year in the last three quarters in tier 3 and 4. Also, these represented nearly 10 percent of its total revenue.

The analysts said in a note, "The good news is that Target plans to convert over 300 stores to smart lighting in the next several months, which will quadruple Acuity's unmatched installed base of beacon-enabled smart lighting fixtures. We estimate this deal to be worth well over $100m and raise our 4QFY16 and 1QFY17 revenue estimates accordingly."

The brokerage was also impressed by 30 percent contribution margin as it was well above the projected level of mid-to-high 20s though down from the mid-30s in the previous quarter. The analysts think the margins could drop further in the upcoming quarters due to the recent sharp rise in steel prices while LED prices declined.

CLSA said its estimation was boosted due to higher sales but with lower margins. The analysts concluded, "We continue to see AYI as one of the best large-cap industrial growth stories out there but its valuation leaves us at Outperform. Our $270 target price is based on 22x forward PE, in line with its five-year average but lower than the current 26x."