Expansion Into Intelligent Spaces And New Verticals Will Shape A Positive Future

Key Takeaways

• Acuity Brands' focus on technology and operational streamlining is poised to enhance revenue growth and operational margins across sectors.
  
• Pursuing new markets and smart, sustainable solutions is expected to broaden the company's addressable market and positively impact future earnings.
  
• Diversification into new markets and verticals introduces potential revenue and profit risks if these strategies do not yield the expected growth or market share.

Catalysts

Provides lighting, lighting controls, building management system, location-aware applications in the United States and internationally.

• Acuity Brands' strategy to increase product vitality and elevate service levels through technology is likely to drive revenue and net sales growth in both the Lighting and Spaces segments.
  
• The integration of the Lighting and Supply Chain organizations under one leader aims to streamline operations and improve end-to-end connectivity, potentially leading to productivity improvements and enhanced operational margins.
  
• Expanding into new verticals such as the refueling and horticulture markets, where Acuity has either not competed historically or is underpenetrated, presents opportunities for significant revenue growth.
  
• The focus on making spaces smarter, safer, and greener in the Intelligent Spaces Group, through connecting the edge to the cloud, is expected to increase the addressable market, sales growth, and margins, impacting future revenue and earnings positively.
  
• Acuity Brands' clear growth algorithm, aimed at further expanding market share and investing in growth by adding new verticals, alongside the confidence in improving margins annually, implies a strong forward-looking operational plan that could substantially increase net sales, operating profit margin, and earnings per share.

Assumptions

• Analysts are assuming Acuity Brands's revenue will grow by 6.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.0% today to 12.1% in 3 years time.
• Analysts expect earnings to reach $566.5 million (and earnings per share of $19.3) by about December 2027, up from $422.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.9x on those 2027 earnings, down from 22.6x today. This future PE is lower than the current PE for the US Electrical industry at 23.9x.
• Analysts expect the number of shares outstanding to decline by 1.34% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.31%, as per the Simply Wall St company report.

Risks

• The increased reliance on specific market segments such as refueling and horticulture for future growth introduces risk if these markets do not expand or adopt Acuity Brands' solutions as anticipated, potentially impacting revenue growth.
  
• With significant investments in both organic and inorganic product development, there is a risk of not achieving expected returns on these investments, which could affect net margins.
  
• The strategy to grow margin through strategic pricing and service enhancements could backfire if competitors respond with aggressive pricing or service offerings, putting pressure on Acuity Brands' earnings.
  
• The ambitious plan for mid-single digits growth in the Lighting business and low to mid-teens growth in the Intelligent Spaces Group hinges on market conditions and growth prospects that may not materialize as expected, posing risks to expected revenue growth.
  
• The company's focus on expanding the addressable market by adding new verticals where they have not historically competed or are underpenetrated carries the risk of not achieving the anticipated market share or profitability in these new areas, potentially impacting overall profit margins.

Valuation

• The analysts have a consensus price target of $330.29 for Acuity Brands based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $370.0, and the most bearish reporting a price target of just $303.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $4.7 billion, earnings will come to $566.5 million, and it would be trading on a PE ratio of 20.9x, assuming you use a discount rate of 7.3%.
• Given the current share price of $312.85, the analyst's price target of $330.29 is 5.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.