Despite the headwinds of inflation, high material costs, labor shortages, and supply challenges, the spending on home improvement remained healthy as Americans spent an average of $8,484 on home improvement projects in 2022, up 2% compared to 2020, according to Angi.

Moreover, despite the rising interest rates, 50% of people expect to spend the same amount in 2023, with 28% planning to spend less and 22% expecting to spend more.

With the Fed expected to keep raising interest rates this year, the rise in mortgage rates is expected to hamper the demand for new housing purchases. Kapitus’ chief operating officer Ben Johnston said, “Higher interest rates will depress home sales and will make financing new construction considerably more expensive.”

However, he added, “But we do expect continued demand for home renovations as housing purchases decline, as consumers with fixed low-interest rate mortgages look to improve what they own versus trading up.”

Therefore, investors could buy fundamentally strong home improvement stock Acuity Brands, Inc. (AYI) to capitalize on the home improvement trend. On the other hand, Bed Bath & Beyond Inc. (BBBY) might be avoided due to its poor fundamentals and weak growth prospects.

Stock to Buy:

Acuity Brands, Inc. (AYI)

AYI provides lighting and building management solutions worldwide. The company operates through two segments: Acuity Brands Lighting and Lighting Controls (ABL) and the Intelligent Spaces Group (ISG).

In terms of the trailing-12-month gross profit margin, AYI’s 41.77% is 44.1% higher than the 28.99% industry average. Its 7.29% trailing-12-month levered FCF margin is 118.2% higher than the industry average of 3.34%. Likewise, its 18.68% trailing-12-month ROCE is 31.2% higher than the industry average of 14.24%.

For the fiscal first quarter that ended November 30, 2022, AYI’s net sales increased 7.8% year-over-year to $997.90 billion. Its non-GAAP net income increased 6.1% year-over-year to $107.50 million.

The company’s non-GAAP operating profit increased 5.3% year-over-year to $140.10 million. Moreover, its adjusted EBITDA increased 4.1% year-over-year to $153 million, while its non-GAAP EPS came in at $3.29, representing a 15.4% increase from the prior-year quarter.

Analysts expect AYI’s EPS and revenue for the quarter ending February 28, 2023, to increase 6.1% and 5.5% year-over-year to $2.73 and $958.98 million, respectively. It has an impressive earnings surprise history, surpassing the consensus EPS estimates in each of the trailing four quarters. The stock has gained 11.7% over the past month to close the last trading session at $185. 

AYI’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.  

Within the Home Improvement & Goods industry, it is ranked first out of 60 stocks. It has an A grade for Quality and a B for Value.

We have also given AYI grades for Growth, Momentum, Stability, and Sentiment. Get all AYI ratings here. 

Stock to Avoid:

Bed Bath & Beyond Inc. (BBBY)

BBBY operates a chain of retail stores. It sells a range of domestic merchandise, bath items, kitchen textiles, and home furnishings.

In terms of the trailing-12-month gross profit margin, BBBY’s 26.14% is 26.5% lower than the 35.58% industry average. Its trailing-12-month levered FCF margin is negative compared to the industry average of 1.32%. Likewise, its trailing-12-month net income margin is negative compared to the industry average of 5.18%.

BBBY’s net sales for the third quarter (ended November 26, 2022) declined 33% year-over-year to $1.26 billion. The company’s adjusted net loss widened considerably year-over-year to $331.23 million. In addition, its adjusted loss per share widened significantly from the prior-year quarter to $3.65.

Analysts expect BBBY’s EPS for the quarter ending February 28, 2023, to remain negative. Its revenue for the same quarter is expected to decline 31.9% year-over-year to $1.40 billion. It has a bleak earnings surprise history, missing the consensus EPS estimates in each of the trailing four quarters. Over the past nine months, the stock has fallen 78.9% to close the last trading session at $2.87. 

BBBY’s POWR Ratings are consistent with this bleak outlook. The stock has an overall rating of F, translating to a Strong Sell in our proprietary rating system. It is ranked #59 in the same industry. In addition, it has an F grade for Stability and Sentiment and a D for Quality. 

To see the other ratings of BBBY for Growth, Value, and Momentum, click here.

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AYI shares were trading at $187.31 per share on Tuesday afternoon, up $2.31 (+1.25%). Year-to-date, AYI has gained 13.10%, versus a 5.52% rise in the benchmark S&P 500 index during the same period.

About the Author: Malaika Alphonsus

Malaika's passion for writing and interest in financial markets led her to pursue a career in investment research. With a degree in Economics and Psychology, she intends to assist investors in making informed investment decisions. More...

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