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Lighting It Up With Acuity


Given the premium paid in the Genlyte deal, Acuity looks extremely undervalued.

"When the lights go down in the city
And the sun shines on the bay
I want to be there in my city
Ohh, ohh..."

- Lights (Journey)

O.K., laugh all you want, but I have always been a bit of a Journey fan.

Granted, these guys are the stereotypical 80's band right down to the acrimonious break up, but I still find myself turning up the radio every time a Journey tune comes on. Lights was written about San Francisco and is one of those songs you cannot help but sing along to. My favorite lyric from the song? "So you think you're lonely, Well my friend I'm lonely too" - just fantastic.

Well, up until the other day, Genlyte (GLYT) was a very lonely stock.

After topping out around $87.75 in June, Genlyte saw its stock price plummet down to $57.15 in late October. The hysteria that gripped the housing market quickly spread to the downstream industries and the market took no prisoners.

Then seemingly out of nowhere on November 26, Philips (PHG) comes along and announces it is going to acquire Genlyte for $95.50/share, or $2.7 bln cash.

Well, with all bad news in the housing market and recently the non-residential construction market one would think that Philips could have acquired GLYT "on the cheap." A 10% premium perhaps, maybe 15%, worst case 25%? None of the above folks. Phillips paid just north of a 50% premium from the close of the prior trading session.

According to its website, "The Genlyte Group Incorporated is a leading manufacturer of lighting fixtures, controls, and related products for the commercial, industrial and residential markets." If we take for granted the fact that Philips did its proper due diligence in terms of examining Genlyte, we are left with one conclusion. Phillips is making a rather large statement about its views going forward on the health of the construction market, be it residential or non-residential.

The Genlyte trade is over. But there may be another one that still has yet to hit the radar screen of Wall Street. Acuity Brands (AYI) is another one of the world's leading providers of lighting fixtures. Whether or not AYI will become a takeover candidate remains to be seen. But one thing that seems certain is that, given the premium paid in the Genlyte deal, Acuity looks extremely undervalued. After topping out around $66 in July, Acuity, much like Genlyte, saw its stock price crushed, trading down to $34.04 earlier this month.

At around 12 times trailing and 9.5 times forward earnings, Acuity is significantly cheaper than Genlyte's current valuations of 19 times trailing and 17 times forward earnings. On top of that, with a relatively small float of 42 mln shares and a 12% short interest, AYI is one of those stocks that the shorts love on the way down, but break out into a cold sweat from on the way up. On October 4, AYI reported a lackluster 4Q where its EPS of $1.18 was in-line but revenues of $693 mln fell short of "Street consensus" of $712.1 mln. But 2007 was a rather nice year, all in all, for Acuity. Net income increased 39% to $148 mln. Net sales grew 6% to over $2.5 bln and maybe most importantly, return on shareholders' equity rose to a record 24%.

The management team, led by Chairman of the Board, President and Chief Executive Officer Vernon Nagel, seem to be doing everything right. My sense is now that we have seen the Philips/Genlyte deal, Wall Street analysts are scrambling to get up to speed on other leading names in the space. Acuity is going to be one of the names that will start to get a lot of attention.
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No positions in stocks mentioned.

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