Over the last six months, Acuity Brands’s shares have sunk to $272.08, producing a disappointing 16.5% loss while the S&P 500 was flat. This was partly due to its softer quarterly results and might have investors contemplating their next move.
Is there a buying opportunity in Acuity Brands, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Acuity Brands Not Exciting?
Despite the more favorable entry price, we're cautious about Acuity Brands. Here are three reasons why we avoid AYI and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Unfortunately, Acuity Brands’s 2.2% annualized revenue growth over the last five years was sluggish. This fell short of our benchmarks. 
2. Core Business Falling Behind as Demand Declines
Investors interested in Electrical Systems companies should track organic revenue in addition to reported revenue. This metric gives visibility into Acuity Brands’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.
Over the last two years, Acuity Brands’s organic revenue averaged 3% year-on-year declines. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests Acuity Brands might have to lean into acquisitions to grow, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus). 
3. Free Cash Flow Margin Dropping
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, Acuity Brands’s margin dropped by 2.5 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. Acuity Brands’s free cash flow margin for the trailing 12 months was 11.5%.
Final Judgment
Acuity Brands isn’t a terrible business, but it doesn’t pass our bar. Following the recent decline, the stock trades at 14.7× forward P/E (or $272.08 per share). Investors with a higher risk tolerance might like the company, but we don’t really see a big opportunity at the moment. We're fairly confident there are better investments elsewhere. Let us point you toward one of our top software and edge computing picks.
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