Over the past six months, Acuity Brands has been a great trade. While the S&P 500 was flat, the stock price has climbed by 6.1% to $269.79 per share. This run-up might have investors contemplating their next move.
Is there a buying opportunity in Acuity Brands, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
We’re glad investors have benefited from the price increase, but we're swiping left on Acuity Brands for now. Here are three reasons why AYI doesn't excite us and a stock we'd rather own.
Why Is Acuity Brands Not Exciting?
One of the pioneers of smart lights, Acuity (NYSE:AYI) designs and manufactures light fixtures and building management systems used in various industries.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance is one signal of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Regrettably, Acuity Brands’s sales grew at a sluggish 1.5% compounded annual growth rate over the last five years. This was below our standards. 
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 2.6% 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 Stuck in Neutral
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.
As you can see below, Acuity Brands’s margin was unchanged over the last five years, showing it couldn’t improve. Its free cash flow margin for the trailing 12 months was 12.8%.
Final Judgment
Acuity Brands isn’t a terrible business, but it isn’t one of our picks. With its shares topping the market in recent months, the stock trades at 15.2× forward price-to-earnings (or $269.79 per share). Beauty is in the eye of the beholder, but we don’t really see a big opportunity at the moment. We're pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at one of our all-time favorite software stocks.
Stocks We Would Buy Instead of Acuity Brands
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