TSC Ratings' Updates: Quanta

We've downgraded Acuity Brands (AYI Quote), which engages in the design, production, and distribution of lighting fixtures, from buy to hold. Strengths include its growth in earnings per share, notable return on equity and attractive valuation levels. However, as a counter to these strengths, we also find weaknesses including unimpressive growth in net income and weak operating cash flow.

Acuity Brands improved EPS by 5.2% in the most recent quarter compared with the same quarter a year ago and has demonstrated a trend of positive EPS growth over the past two years, which we feel should continue, suggesting improving business performance. During the past fiscal year, Acuity increased its bottom line by earning $3.57 vs. $2.93 in the prior year, and the market expects further improvement this year to $3.83.

Return on equity increased from the same quarter one year prior, a clear sign of strength within the company. On the basis of ROE, Acuity outperformed both the electrical equipment industry and the S&P 500. Revenue dropped by 3.3% since the same quarter a year ago, compared with the industry average of 12.5%. Net income decreased by 18.6%, to $41.91 million. Net operating cash flow has declined marginally to $115.19 million, or 2.16% when compared with the same quarter last year. Acuity is in line with the industry average cash flow growth rate of -11.64%.

We've downgraded Enstar Group (ESGR Quote) from hold to sell, driven by its generally disappointing historical performance in the stock itself, premium valuation and weak operating cash flow.