Acuity Brands (AYI)

Intelligent lighting and space solutions provider Acuity Brands (NYSE:AYI) reported revenue ahead of Wall Street’s expectations in Q2 CY2025, with sales up 21.7% year on year to $1.18 billion. Its non-GAAP profit of $5.12 per share was 15.3% above analysts’ consensus estimates.

Company Overview

One of the pioneers of smart lights, Acuity (NYSE:AYI) designs and manufactures light fixtures and building management systems used in various industries.

Like many equipment and component manufacturers, electrical systems companies are buoyed by secular trends such as connectivity and industrial automation. More specific pockets of strong demand include Internet of Things (IoT) connectivity and the 5G telecom upgrade cycle, which can benefit companies whose cables and conduits fit those needs. But like the broader industrials sector, these companies are also at the whim of economic cycles. Interest rates, for example, can greatly impact projects that drive demand for these products.

Competitors offering lighting and lighting systems solutions include Eaton (NYSE:ETN), Signify (OTCMKTS:PHPPY), and Osram Licht AG (OSAGF:OTCPK)

Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Regrettably, Acuity Brands’s sales grew at a sluggish 4.3% compounded annual growth rate over the last five years. This was below our standard for the industrials sector and is a tough starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Acuity Brands’s recent performance shows its demand has slowed as its annualized revenue growth of 1.4% over the last two years was below its five-year trend.

We can better understand the company’s sales dynamics by analyzing its organic revenue, which strips out one-time events like acquisitions and currency fluctuations that don’t accurately reflect its fundamentals. Over the last two years, Acuity Brands’s organic revenue was flat. Because this number aligns with its normal revenue growth, we can see the company’s core operations (not acquisitions and divestitures) drove most of its results.

This quarter, Acuity Brands reported robust year-on-year revenue growth of 21.7%, and its $1.18 billion of revenue topped Wall Street estimates by 3.1%.

Looking ahead, sell-side analysts expect revenue to grow 12% over the next 12 months, an improvement versus the last two years. This projection is noteworthy and implies its newer products and services will fuel better top-line performance.

All else equal, we prefer higher gross margins because they usually indicate that a company sells more differentiated products and commands stronger pricing power.

Acuity Brands has best-in-class unit economics for an industrials company, enabling it to invest in areas such as research and development. Its margin also signals it sells differentiated products, not commodities. As you can see below, it averaged an elite 44.1% gross margin over the last five years. Said differently, roughly $44.10 was left to spend on selling, marketing, R&D, and general administrative overhead for every $100 in revenue.

Acuity Brands produced a 48.4% gross profit margin in Q2, up 1.7 percentage points year on year. Acuity Brands’s full-year margin has also been trending up over the past 12 months, increasing by 2 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as manufacturing expenses).

Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling those products, and most importantly, keeping them relevant through research and development.

Acuity Brands has been an efficient company over the last five years. It was one of the more profitable businesses in the industrials sector, boasting an average operating margin of 12.7%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, Acuity Brands’s operating margin rose by 1 percentage points over the last five years, as its sales growth gave it operating leverage.

This quarter, Acuity Brands generated an operating margin profit margin of 11.9%, down 3.1 percentage points year on year. Conversely, its revenue and gross margin actually rose, so we can assume it was less efficient because its operating expenses like marketing, R&D, and administrative overhead grew faster than its revenue.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Acuity Brands’s EPS grew at a remarkable 14.6% compounded annual growth rate over the last five years, higher than its 4.3% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

Diving into the nuances of Acuity Brands’s earnings can give us a better understanding of its performance. As we mentioned earlier, Acuity Brands’s operating margin declined this quarter but expanded by 1 percentage points over the last five years. Its share count also shrank by 20.5%, and these factors together are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

For Acuity Brands, its two-year annual EPS growth of 10.4% was lower than its five-year trend. We still think its growth was good and hope it can accelerate in the future.

In Q2, Acuity Brands reported EPS at $5.12, up from $4.15 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Acuity Brands’s full-year EPS of $17.12 to grow 8.7%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Acuity Brands has shown robust cash profitability, enabling it to comfortably ride out cyclical downturns while investing in plenty of new offerings and returning capital to investors. The company’s free cash flow margin averaged 12.3% over the last five years, quite impressive for an industrials business.

Taking a step back, we can see that Acuity Brands’s margin expanded by 5.3 percentage points during that time. This is encouraging, and we can see it became a less capital-intensive business because its free cash flow profitability rose more than its operating profitability.

Acuity Brands’s free cash flow clocked in at $398.9 million in Q2, equivalent to a 33.8% margin. This result was good as its margin was 19.3 percentage points higher than in the same quarter last year, building on its favorable historical trend.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Although Acuity Brands hasn’t been the highest-quality company lately because of its poor top-line performance, it historically found a few growth initiatives that worked out well. Its five-year average ROIC was 16.5%, impressive for an industrials business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Uneventfully, Acuity Brands’s ROIC has stayed the same over the last few years. Given the company’s underwhelming financial performance in other areas, we’d like to see its returns improve before recommending the stock.

Acuity Brands reported $371.8 million of cash and $1.09 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $775.8 million of EBITDA over the last 12 months, we view Acuity Brands’s 0.9× net-debt-to-EBITDA ratio as safe. We also see its $12.7 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by how significantly Acuity Brands blew past analysts’ organic revenue expectations this quarter. We were also excited its EPS and EBITDA outperformed Wall Street’s estimates by a wide margin. Zooming out, we think this quarter featured some important positives. The stock traded up 7.5% to $308.70 immediately following the results.

Updated: July 9, 2025 at 11:34 PM EDT

Before making an investment decision, investors should account for Acuity Brands’s business fundamentals and valuation in addition to what happened in the latest quarter.

Acuity Brands isn’t a terrible business, but it doesn’t pass our bar. For starters, its revenue growth was uninspiring over the last five years. And while Acuity Brands’s admirable gross margins indicate the mission-critical nature of its offerings, its organic revenue declined.

Acuity Brands’s P/E ratio based on the next 12 months is 16.3x. While this valuation is fair, the upside isn’t great compared to the potential downside. We're fairly confident there are better investments elsewhere.

Wall Street analysts have a consensus one-year price target of $335.57 on the company (compared to the current share price of $302.95).