On Aug 28, we issued an updated research report on Avery Dennison Corporation AVY. The company is poised to gain from lower tax rates and pricing actions. Its focus on cost cutting, restructuring in the Label and Graphic Materials (LGM) segment, investments and acquisitions will also drive growth.
Let’s illustrate these growth factors in detail.
Pricing Actions & Lower Tax to Aid Avery Dennison’s Earnings
For 2018, Avery Dennison’s earnings per share guidance is at $5.95-$6.10, reflecting year-over-year growth of 20.5% at the mid-point. The guidance includes a 25% effective tax rate compared with 28% in 2017. Avery Dennison estimates organic sales growth of 5-5.5% for the year, reflecting higher contribution from pricing to offset inflation.
Notably, the company announced new price increases during second-quarter 2018 in North America, Europe, South Asia and Latin America, and expects to fully recover the cumulative gap between cost and price. Further, Avery Dennison’s aggressive cost cutting and restructuring, as part of the current optimization program, will likely lead to higher savings and earnings.
Restructuring in LGM Segment
The LGM segment is Avery Dennison’s largest and highest-return business. The company’s focus on restructuring actions associated with consolidation of the European footprint of the Label and Graphic Materials segment will drive higher returns for the segment and improve its competitiveness. The plan, which is anticipated to conclude by 2019, includes net reduction in headcount of approximately 150 positions, shutdown or movement of several coating assets, as well as the closure of a plant in Schwelm, Germany. The company anticipates realizing approximately $25 million in annualized savings from this plan beginning 2020.
Investments & Acquisitions to Fuel Growth
Avery Dennison will continue to increase the pace of investment to leverage specialty labels, graphics and reflective solutions business as demonstrated by the acquisitions of Mactac Europe, Hanita Coatings and Ink Mill. In 2017, the company acquired Yongle Tape Company Ltd., a manufacturer of specialty tapes and related products used in a variety of industrial markets, including the global automotive industry.
In 2017, Avery Dennison also acquired Longford, Ireland-based Finesse Medical, a maker of materials used for wound care and skin treatments. Finesse Medical is a strategic fit with Avery Dennison’s Vancive Medical Technologies. Finesse Medical’s product portfolio of silicone gels and polyurethane foam dressings will complement Avery Dennison’s products in wound care. All these acquisitions are in line with the company’s strategy to accelerate its portfolio shift to higher-value categories.
Share Price Performance
Avery Dennison's shares have outperformed the industry with respect to price performance in the past three months. The company's shares have lost around 0.4% compared to industry’s loss of 0.5%.
Zacks Rank & Other Stocks to Consider
Avery Dennison currently carries a Zacks Rank #2 (Buy).
Some other top-ranked stocks in the same sector are W.W. Grainger, Inc. GWW, iRobot Corporation IRBT and Atkore International Group Inc. ATKR. All three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Grainger has a long-term earnings growth rate of 12.5%. Its shares have gained 17%, over the past three months.
iRobot Corporation has a long-term earnings growth rate of 19.5%. The company’s shares have surged 80% over the past three months.
Atkore International has a long-term earnings growth rate of 10%. The stock has rallied 26% over the past three months.
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