Acuity Brands (AYI) is likely to see earnings per share upside driven by "firmer" gross margins and the overlooked benefits from the recently completed QSC acquisition, Morgan Stanley said in a note Tuesday.

The brokerage said it expects continued gross margin outperformance for the company, signaling that recent improvements are structural amid challenges in the non-residential construction market.

The QSC acquisition enhances the company's organic growth and gross margin potential, with the brokerage indicating a 120 basis point boost to normalized gross margins, a key performance indicator not yet reflected in consensus forecasts, the note said.

"[Acuity Brands management] continues to display lights out execution and upside from the QSC deal should further boost sentiment, pushing the equity towards compounder status and serving as a tailwind for [Acuity Brands] valuation," Morgan Stanley said in the note.

Morgan Stanley raised its price target to $370 from $304, and upgraded the stock's rating to overweight from equal-weight.

Shares of Acuity Brands were up more than 4% in recent Tuesday trading.

Price: 319.98, Change: +13.62, Percent Change: +4.44