On Dec 31, 2014, Zacks Investment Research upgraded manufacturer of pressure-sensitive materials, Avery Dennison Corporation (AVY), to a Zacks Rank #3 (Hold) from a Zacks Rank #4 (Sell).
Why the Upgrade?
Shares of Avery Dennison attained a new 52-week high of $52.90 on Dec 29. The share price got a boost as oil prices slumped to a 5-year low on Dec 16. Resin, a derivative of oil, makes up almost a major portion of the cost of goods sold of the company.
The company’s shares have been on the rise since the company reported third-quarter 2014 results on Oct 24. Earnings increased 11.6% year over year to 77 cents per share, ahead of the Zacks Consensus Estimate of 74 cents. With this earnings beat, the company has outperformed the Zacks Consensus Estimate in three of the four trailing quarters with an average positive surprise of 1.70%.
Avery Dennison anticipates $12 million of savings in 2014, stemming from its restructuring program, primarily related to the consolidation of certain European operations. These actions are expected to result in another $24 million of savings in 2015. With a relentless focus on cost-cutting and portfolio optimization, earnings growth trajectory at Avery Dennison should continue over the next few years.
Avery Dennison continues to drive growth by expanding in emerging markets and developing innovative products to gain market share. Avery Dennison is adopting strategies to improve variable margins and product mix in the Retail Branding Information Solutions (RBIS) segment. The company is also focusing on higher margin product categories including specialty products, graphics and performance tapes. At the same time, Avery Dennison is adjusting its pricing strategy for lower margin products in certain geographies.
The RBIS segment continues to benefit from increased demand from the European retailers and brand owners, driven by RFID (radiofrequency identification) and share gain across most market segments. Adoption trends remain favorable and RFID is expected to be a long term-driver, growing more than 20% annually. The segment is expected to deliver organic sales growth in the range of 4% to 5% by 2018, outperforming the industry growth rate of 1–2%, backed by new product introductions and growth in RFID.
For the Pressure Sensitive Materials segment, Avery Dennison targets 4–5% organic sales growth for the 2013–2018 period aided by market share gains, growth in emerging markets, accelerated growth in graphics, and performance tapes and innovation-led progress in label and packaging materials.
However, on the flipside, the Vancive Medical Technologies unit, which is currently operating at a loss due to high operating expenses and investment in new growth platforms (research and development, marketing, and upgrades to operations), is weighing the company down. Even though the unit is expected to deliver profits in 2015, it will continue to generate losses in 2014. Moreover, weakness in retail apparel demand in the U.S and a slowdown in China remain major concerns for the Retail Branding Information Solutions segment.
In line with this, Avery Dennison trimmed the upper end of its 2014 adjusted earnings per share outlook, to range between $3.00 and $3.05, as against the previously projected $3.00–$3.10. This reflects continued softness in Retail Branding Information Solutions segment’s top line, the pricing and mix challenges in Pressure Sensitive Materials segment and currency headwind.
Other Stocks to Consider
While we expect Avery Dennison to perform in line with its peers in the coming months, one can consider better-ranked stocks in the sector like Bemis Company, Inc. (BMS), Packaging Corporation of America (PKG) and Sealed Air Corporation (SEE). All these stocks carry a Zacks Rank #2 (Buy).
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