Cowen analyst, Jeffrey Osborne's top pick for 2016 is Acuity Brands (NYSE: AYI) which is seeing improving end market strength, increased LED volumes and the resulting improvement in operating margins as well as a positive outlook on Tiered Solutions. The multiple is lofty but EPS is growing faster than revenue coupled with continued market share gains. The company is growing 1.5-2.0X the market, with revenue growing ~40% over the next two years and EPS growing ~26% in FY16E and ~32% in FY17E.
The firm reiterated an Outperform rating and lifted its price target to $275.00 (from $200.00).
The bear case largely revolves around valuation; however, few industrial growth companies offer 25%-30% EPS growth over the coming 2 years and trade at a FY2 PEG ratio of ~0.8.
The opportunity to expand margins through Tiered Solutions (selling a system/solution vs. pinpoint products) continues to be underappreciated by investors. Non-res trends as well as building code changes should continue to drive this high-margin offering.
The number one catalyst behind Acuity Brands is their continued success in the non-res upgrade cycle, which today makes up about half their revenue mix versus about 20%-30% for the industry. The breadth of products coupled with a controls strategy has led to market share gains in this segment, which offers premium margins versus the retrofit market which is more competitive. LED penetration remains low in North America, with about 10%-12% of outdoor fixtures converted and 3%-5% of indoor fixtures converted.
A near-term catalyst for the stock should be Acuity's 1Q16 earnings call which will be held on January 8th at 10AM ET