Why Did Acuity Brands, Inc Fall After Strong Q2 Results?

The Institutions Are Shedding Acuity Brands

If you are asking yourself why did Acuity Brands, Inc (NYSE: AYI) fall 10% after reporting a better than expected quarter you are not alone. It took us a little bit of digging ourselves and the best we can come up with is the institutions are selling the stock. The institutions have been net sellers of the stock for the last 3 quarters and the Q1 period of 2022 saw some fairly heavy action. The sum of selling over the past 3 quarters is worth about 5.6% of the market cap with shares at their new low with about 200 basis points of that action in the calendar Q1 period. The upshot is that institutional holdings equal almost 97% of the company so this activity is more about rotation than a true shift in sentiment. In that light, a bottom may be at hand if the FQ2 results are any indication. 

Acuity Brands Has Bright Quarter, Outlook Dim

Acuity Brands had a great quarter in which revenue not only grew by double digits and exceeded expectations but growth accelerated from the previous quarter and margins were better than expected. The problem for the market, possibly a factor in why share prices are down, is that, from an external viewpoint, economic headwinds appear to be growing and the company provided no guidance for the coming quarter. The revenue of $909.1 million is great, it’s up 17.1% and beat the Marketbeat.com consensus by 255 basis points, but the market needs an idea of what to expect, or else it gets skittish. On a segment basis, the core ABL business grew by 17.1% with a 107% increase in corporate sales while the ISG segment grew at a slightly slower 15.5% pace. 

Moving down to the margin, both the gross and adjusted margins came under pressure but pricing increases, revenue leverage, and internal efficiencies helped to offset some of the difference. The gross margin contracted by 170 basis points and the operating margin by 40 to leave the operating profit up 12% versus the 17.1% increase in revenue. On the bottom line, the adjusted EPS looks much better at $2.57 and up 22% but there are share buybacks to consider. The company repurchased 0.6 million shares or about 1.5% of the shares outstanding. We expect share repurchases to continue. 

Acuity Brands Prioritizes The Dividend 

Acuity Brands made a special point of prioritizing the dividend in its earnings statement and presentation but don’t get too excited about the news. The company pays a safe distribution but it is a small 0.28% of the earnings and the payout amount hasn’t budged in years. The remainder of earnings is being funneled into growth and share repurchases which is also good, but income investors will probably want to put their money elsewhere. 

The Technical Outlook: Acuity Brands, Inc Enters The Buy Zone 

Price action in Acuity Brands, Inc has been rangebound over the past year or so and trending lower within that range in the nearer term. That movement has the price down at the low of the range following the Q2 release and trading at levels we think are attractive. The stock is trading around 15X its earnings and at a level that has produced strong support in the past. We are expecting to see a bottom form at or near this level, and for the price action to begin moving higher later in the year when supply chain and inflationary hurdles are expected to wane.