LSI INDUSTRIES INC (LYTS) stock intrinsic value fair value estimate & owner earnings analysis

LSI Industries makes two kinds of products for chain retailers and fuel stations. Its Lighting segment (fiscal 2026 sales $266.2 million, operating income $32.7 million) builds LED fixtures, poles and controls for convenience stores and fuel canopies, parking lots and garages, quick-service restaurants, grocery stores, auto dealers and warehouses. Its Display Solutions segment (sales $423.2 million, operating income $31.8 million) builds store fixtures, millwork, refrigerated cases, printed graphics and signage for many of the same customers. About 7% of sales are outside the United States. The fiscal year ends June 30. What is new: the fiscal 2026 annual report is now filed. It shows the company's largest deal, Royston, bought on March 24, 2026 for $338.2 million with the new credit facility and a $98.1 million share sale. In its first 99 days Royston added $73.5 million of sales and $2.4 million of operating profit. Our earlier estimates (bear $5.80, base $15.11, bull $27.22) were built on a different basis and are not comparable with the figures below. Earnings level. We measure the cash the business produces for its owners: operating cash flow, less the swings in receivables, inventory and payables (which reverse), less stock compensation (a real cost), less the capital spending needed to stand still. Before interest, that was $31.9, $40.3, $31.5, $38.5 and $48.6 million in fiscal 2022 through 2026. Fiscal 2022 would otherwise look like a cash loss; it was a $38.3 million working-capital build, mostly receivables and inventory. We use fiscal 2022 onward because the JSI acquisition lifted Display Solutions sales from $126.6 million to $221.7 million that year; earlier years describe a much smaller business. The median is $38.5 million. Royston is not in that history, so we add what the filing documents: its pro forma statements show Royston lifting combined operating income by about $20.8 million in each of fiscal 2024 and fiscal 2025, after about $8.9 million a year of non-cash amortization of acquired customer relationships and technology, which we add back. Taxed at about 26%, Royston adds roughly $22.0 million, for a starting level of $60.5 million a year. Royston is about 36% of that figure and is the least proven piece. Growth. Owner earnings grew 20.6% in fiscal 2026 (10.3% per share after the new shares). We start year one of the base case at 0%. We credit no growth in the base or bear cases. Left out: further acquisitions (each recent deal has been larger than the last and paid for with debt or new shares, so it is not a small repeatable step), cross-selling, Royston synergies and margin expansion. The bull case credits 3% a year for five years because it is the continuation of what the last year showed: Lighting operating income rose 8% on a 7% sales gain. Because the acquired customer relationships are being amortized over 20 years, and the company wrote off $28.0 million of acquired goodwill in fiscal 2018 and $20.2 million in fiscal 2019, we do not treat the earnings as permanent: in every case the level holds for ten years and then fades evenly to zero over the following ten, since nothing in the filings locks in customer programs beyond that. Debt. The company has borrowed $255.9 million ($10.0 million due within a year), holds $14.2 million of cash, and owes a $7.0 million earn-out on the 2025 Canada's Best purchase: $248.7 million net. The term loan ($197.5 million after the first payment) amortizes $2.5 million a quarter, rising to $3.75 million from June 2028 and $5.0 million from June 2030; the term loan and the $150 million revolver (about $90 million undrawn at June 30, 2026) both mature March 24, 2031. Rates were 5.5% on the term loan and 6.2% on the revolver, so interest runs about $14.5 million a year. The lenders cap net debt at 4.00 times EBITDA now, 3.75 times from the quarter ending December 31, 2026 and 3.50 times from the quarter ending September 30, 2027. Shares: 36.97 million outstanding plus 1.98 million of options and stock units, 38.95 million in all. Base case: $60.5 million a year for ten years, then fading to zero over ten more. The business is worth $569.0 million; it owes $248.7 million; that leaves $320.3 million, or $8.22 a share. Bull case: the starting level is $73.2 million (the legacy business at about $51.2 million, which is fiscal 2026 cash earnings less Royston's 99 days plus $6.2 million after tax of one-time acquisition costs, plus Royston's $22.0 million), growing 3% a year for five years to $84.9 million, flat to year ten, then fading over ten years. The business is worth $777.1 million; it owes $248.7 million; that leaves $528.4 million, or $13.56 a share. Bear case: we use the company's own last downturn, fiscal 2018 to 2020, when sales slid from $331.4 million to $305.6 million (down 7.8%) and cash earnings were only 3.7% and 5.0% of sales in fiscal 2019 and 2020 (4.3% on average). Applied to combined sales of $872.2 million cut by 7.8% ($804.1 million), that is $34.9 million a year for four years, covering interest of about $14.5 million 2.4 times. Recovery stops short of the base: years five to ten earn $49.5 million, the same 18% shortfall to the median that fiscal 2024 showed. At $34.9 million, earnings would sit well below what the tightening lender limits require, so we assume lenders waive them for a fee of 1% of the debt and 3 percentage points of extra interest for four years, which costs $28.4 million. The business is worth $415.3 million; it owes $248.7 million plus $28.4 million of covenant relief, $277.1 million; that leaves $138.2 million, or $3.55 a share. Testing the case. The most load-bearing assumption is Royston. Its first 99 days earned $2.4 million of operating profit, which annualizes to about $13.2 million after tax once amortization is added back and tax is applied, against the $22.0 million we use. If Royston only earned that, base value would be about $6.08 a share. The company reports $6.1 million of acquisition-related charges in Display Solutions and $3.9 million at corporate in fiscal 2026, which likely explain part of the weak first months, but the filing does not split them by acquisition, so the gap could not be fully reconciled. The filing also warns that tariffs on imported components will raise costs. Margin-of-safety price. How sure are we of the level? Fairly sure of the legacy $38.5 million: five years, all between $31.5 and $48.6 million. Much less sure of Royston's $22.0 million, which rests on unaudited pro forma figures and 99 days of actual results. The worst plausible outcome is a retail spending slowdown while lender limits tighten; the structure survives it because interest is covered 2.4 times even in the bear case, nothing matures before March 2031, and Royston's cost is already paid, but it would need a lender waiver and would likely halt the dividend. Outcomes no case models include losing a major chain customer or a Royston integration failure. If we are wrong about Royston, the base value is about $6.08. If we are wrong about the downturn, the bear is $3.55. The price assumes a holding period of about three years. Over that period the shares pay $0.20 a year ($0.05 quarterly), and mandatory loan payments of $10 million a year (rising to $15 million from June 2028) steadily shift value to shareholders. The margin-of-safety price is $4.00. From that price, if value builds as debt is paid down, the base case implies roughly 35% a year over three years; if Royston earns only its first-99-day rate, roughly 22% a year; and the bear case implies roughly breaking even (roughly 2% a year). A price much above $4.00 leaves too little cushion if Royston disappoints.