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Morgan Stanley upgrades Acuity Brands stock as buybacks and M&A drive valuation upside

EditorEmilio Ghigini
Published 14/01/2025, 09:50

AYI
-0.87%

On Tuesday, Morgan Stanley (NYSE:MS) upgraded Acuity Brands Inc (NYSE:AYI). stock, moving the rating from Equalweight to Overweight and increasing the price target from $304.00 to $370.00. The upgrade aligns with broader analyst sentiment, as InvestingPro data shows six analysts have recently revised their earnings estimates upward. Stifel analysts cited a positive outlook on the company's earnings per share (EPS) due to a stronger gross margin and the benefits from the recent acquisition of QSC.

The upgrade reflects Morgan Stanley's confidence in Acuity Brands' management and their execution abilities. The analysts believe that the QSC acquisition has not been fully appreciated by the market and will contribute to an increase in investor sentiment. This view is supported by the company's strong financial health, with InvestingPro assigning it a "GREAT" overall score. This, in turn, is expected to enhance the company's status as a compounder, positively influencing its valuation.

Acuity Brands has reportedly outperformed in terms of margin improvement and free cash flow generation, key indicators of value creation. The company maintains an impressive gross profit margin of 46.7% and operates with moderate debt levels. These strengths are anticipated to continue, supported by an effective merger and acquisition strategy.

Despite the challenges faced by the non-residential construction sector in the wake of the pandemic, Acuity Brands has managed to lead in class revisions across US Industrials. This success has been attributed to significant margin expansion and robust free cash flow buybacks.

Morgan Stanley's analysts maintain that the improvements seen in Acuity Brands' gross margin are structural, signaling to the market that the company's recent performance is sustainable. The upgraded rating and price target reflect a belief in the ongoing value creation and the potential for further gains from strategic acquisitions.

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