Acuity Brands Deserves A Closer Look At These Levels As The Cash Flow Pours In

Summary

• Acuity Brands remained profitable in its third quarter (which ran from March to May).
• The free cash flow is consistently higher than the net income as the capex is consistently lower than the depreciation charges.
• Acuity Brands hasn't been buying back stock so far this year, but I think the company should consider restarting buying back stock at these levels.
• I currently have no position in Acuity Brands but could write some out of the money put options.
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Introduction

The COVID-19 pandemic has brought the valuations of certain companies back to healthy levels, but in some cases where share prices haven’t bounced back from their March lows, there are some interesting opportunities. Acuity Brands (NYSE:AYI) - one of North America’s leading producers of lighting systems, for instance - still has a net cash position, was profitable in its third quarter (March-May) but on a YTD basis, its share price is still down by approximately 35%. An opportunity?

YCharts

The cash flow in the first nine months of the year remains strong

In the third quarter, Acuity Brands reported a revenue of $776M, which is quite a bit lower than the $948M it generated in the same quarter last year as COVID-19 obviously had an impact on Acuity’s sales. That being said, the company’s profitability remained relatively strong: although Q3 revenue decreased by just over 18%, the COGS fell by in excess of 20% and the $170M drop in revenue resulted in a drop in the operating profit by just over $37M, or roughly a third.

Source: SEC filings

That still is substantial decrease but due to the lower net finance expenses and the lower tax bill (due to the lower pre-tax income), the net income of $60.4M still represented an EPS of $1.53/share (as the average share count slightly decreased as well.

So although the company’s Q3 was undeniably weaker than in 2019, the damage remained relatively limited and I’m looking forward to seeing the company’s Q4 results to see if Acuity was able to stabilize its revenue and profit. Due to the specific focus on North America (98% of the company’s sales are generated in North America) and the continuous COVID-19 problems in the USA, it’s perhaps too soon to expect an improvement of the financial results in

Analyst’s Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.