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Acuity Brands Idea Proposal (AYI)

Acuity Brands Idea Proposal (AYI)
 

Will Acuity Brands suffer as upstream LED manufacturers move downstream?

 

Report Available: September 22, 2017

 

Blueshift’s initial research found AYI coming off a solid quarter with sales outpacing the industry, but in a position where it needs to defend against LED manufacturers like CREE and those from China moving downstream to compete in the luminaires segment. AYI gave positive indicators for 2018 and introduced its lighting IoT entrant, but its small R&D spending is a concern as it tries to compete in this growing segment.

 

Observations

  1. AYI is a leading manufacturer of downstream LED lighting products focused more on the commercial market (85% of sales) than residential (15%). It has ridden the wave of change toward LED lights and now boasts 66% of its sales from LED luminaires. The company reported solidQ3 results beating expectations for revenue and earnings. Sales grew 5% year to year in a soft North American market which saw only low single-digit increases with a preference for lower-cost less feature-rich LED lighting. This softness is expected to continue through 2017, however there are signs of growth rate improvement in 2018 as quoting activity is favorable for medium to large projects. AYI also reported record quarterly margins.
  2. As a downstream player, AYI manufactures and sells luminaires and other products while purchasing the actual LEDs from upstream manufacturers, including CREE. As Chinese manufacturers jumped into LED manufacturing five years ago and brought prices down dramatically, upstream companies like CREE saw its margins decline significantly and decided to move downstream where it now gets half its business from its lighting products division that competes head-to-head with AYI. Chinese manufacturers may not be far behind in following CREE downstream.
  3. An area where lighting companies are focused is on Lighting IoT, also known as connected lighting or smart lighting, with LEDs having dimmable capabilities with automation and analytical applications. AYI introduced the Atrius Internet of Things (IOT) platform and software solution, designed to leverage intelligent luminaires as well as lighting and building management controls. Still, AYI has the lowest R&D spending among its peers as a percent of sales and as an absolute dollar amount.
  4. Automotive, signage, and horticulture are emerging as LED industry growth drivers. Price erosion due to significant competition and consumer preference for low-cost LED lighting packages led to a 9% industry-wide revenue decline for manufacturers in this space in 2015 and a 1% drop in 2016. This year has seen some price stabilization and a 3% overall revenue increase. LED lighting estimates for 2018 are favorable with expectations for 6% to 7% growth. While the lighting LED segment has declined and experience pricing and margin pressure, the automotive market is forecast to experience 9.2% growth in 2017, while signage is will be up 11.2%. Horticulture is a small market, but it is growing the fastest.
  5. Blueshift’s Oct. 6, 2010 report noted LED inventory oversupplies because of the slow developing market for LED lighting. Sources were handling the slow evolution by building to order to keep inventory from getting too high.

 

What effect will upstream players have on AYI as they move downstream? How is AYI as a brand? Is competitive pressure commoditizing the LED lighting market? How are prices trending? Will there be enough sales volume to offset declining prices? What is coming in from China? What is China inventory doing to prices? Where are we on the adoption curve? Can AYI be successful in the LED growth markets of automotive, signage and horticulture? What kind of a growth driver can AYI’s Atrius IoT platform become? When? To gain insight into AYI and the downstream LED market, Blueshift will gather data and issue a market research report from independent sources in the following areas: Independent resellers, Electrical distributors, Professional end users, Retail home improvement centers, Lighting stores, LED manufacturers, and Industry specialists.

 

Companies: Acuity Brands Inc. (AYI) Cree Inc. (CREE), Eaton Corporation (ETN),Hubbell Incorporated (HUBB), Philips Lighting NV (AMS:LIGHT)

 

Research Begins: September 4, 2017