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October 9, 2014

Biggest Risks Ahead During This Earnings Season

By MIchell Clark B.Comm for Profit Confidential

Financial reporting is ramping up and what corporations actually say about their businesses is the best market intelligence available to investors.

Acuity Brands, Inc. (AYI) is in the business of making lights for indoor and outdoor applications. Based in Atlanta, it’s highly likely you’re already using this company’s products without even knowing it.

The business of manufacturing lighting is not front-page news, but that doesn’t matter because for this company, it’s a very good business to be in.

Acuity just announced another quarter of double-digit growth and the company’s outlook remains strong, based on solid activity in the renovation and retrofit markets.

According to the company, its latest quarter produced 15% in total sales growth, hitting $668.7 million. Earnings and earnings per share increased 22% to $54.8 million and a record $1.26 per share, respectively.

Driving the company’s growth is the adoption of LED lighting, which now represents approximately 40% of Acuity’s total sales. Plus, management reported a 17% overall comparative quarterly gain in total sales volume, and the company’s cash position improved substantially in its most recent quarter.

So business conditions for Acuity are pretty good. Company management expects the North American lighting market to grow by the mid- to high single-digits in the upcoming year.

Corporate reporting, while only at a trickle as earnings season is just about to begin, has mostly been decent so far.
There have been good numbers from Bed Bath & Beyond Inc. (BBBY), NIKE, Inc. (NKE), Carnival Corporation (CCL), FedEx Corporation (FDX), Steelcase Inc. (SCS), and Paychex, Inc. (PAYX).

Of course, share prices have already gone up tremendously and good earnings are playing catch-up.

Acuity shot about 12% higher on the stock market after reporting its latest quarter. This position’s been doing very well over the last couple of years.

This market needs corporate reporting at the very least to provide assurance that stocks are worth their recent run up.
Economic data have been all over the map lately and the lack of consistency is a problem. At the end of the day, however, corporate results and management’s outlooks are the best guide for investors.

In recent quarters, institutional investors have bid shares of a company if it beat on only one financial metric. But this market is looking pretty tired out and it won’t be unusual at all if share prices sell off on meeting or beating Wall Street consensus.

Oracle Corporation (ORCL) always reports early and the company didn’t have the greatest quarter. The same goes for AutoZone, Inc. (AZO), whose growth is slowing after years of double-digit growth (partially due to new car sales momentum).

Risk this earnings season is coming from the sluggishness in international operations and currency translation with the stronger U.S. dollar.

This is very much an environment favoring existing winners—those companies that have demonstrated growth in past quarters while increasing dividends and share repurchases.  Investor sentiment isn’t as rosy as it was just a few months ago. Corporate reporting is the most important near-term catalyst, but the broader market is looking tired, so you can’t expect much.

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

Courtesy Profit Confidential, a daily publication for Lombardi Financial customers.  (EconMatters author archive Here)  

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