On Dec 13, we maintained our Neutral recommendation on Avery Dennison Corporation (AVY), a pressure-sensitive materials producer and provider of wide variety of information and brand management solutions. The reiteration was based on expected benefits from restructuring initiatives and divestiture of its underperforming Office and Consumer Products unit. However, the positives may be offset by concerns regarding uncertain macroeconomic environment and Avery’s underfunded pension liability.
Why Reiterated?
Avery’s adjusted earnings increased 35% year over year to 69 cents per share in the third quarter 2013. For 2013, Avery raised its adjusted earnings forecast to the range of $2.60 to $2.70 per share from the previous range of $2.40 to $2.60 per share. The revised guidance represents annual growth of 33% to 38%.
Avery has aggressively implemented a restructuring program to reduce costs across all business segments. As of the end of third quarter 2013, cost cutting measures that have been implemented were expected to yield approximately $110 million in annualized savings. Avery has realized $20 million of these savings in 2012, and expects the majority of the remainder of these savings to be realized in 2013.
In Jan 2013, Avery agreed to divest its underperforming Office and Consumer Products segment along with its Designed and Engineered Solutions businesses to CCL Industries Inc., a global leader in specialty packaging solutions. The net sale proceeds of approximately $402 million will be utilized to repurchase shares and reduce indebtedness. With the divestiture, the company will be able to focus on its market leading, pressure-sensitive materials business, and Retail Branding and Information Solutions segment.
Avery remains committed to its long-term targets (by 2015) of sales growth in the range of 3% to 5% and net income growth of 10-15%. Earnings per share growth of 15-20% is expected to be achieved through continued growth in emerging markets and productivity improvements.
On the flipside, even though Avery delivered organic growth of 4%, 5% and 3.6% respectively in the first, second and third quarters of 2013, it remained lower than the 7% organic growth rate in the fourth quarter of 2012 – the strongest organic growth witnessed since the first quarter of 2011.
Going forward, Avery faces headwinds in the form of an uneven macroeconomic environment and difficult comparisons in the fourth quarter of 2013. For the Retail Branding and Information Solutions segment, increased consumer uncertainty across North America could be a headwind. Sales growth slowed in September, particularly in North America, with a number of domestic customers citing some softening of end market demand.
Furthermore, Avery has a good exposure to Europe, which generates one third of its total revenue from the region. The current weakness in Europe remains a concern. Avery’s total underfunded pension liability is close to $300 million as of end of the third quarter. This will curb the company's ability to ramp up its capital expenditure and invest in growth options.
Other Stocks to Consider
Avery currently retains a Zacks Rank #2 (Buy). Some other stocks worth considering in the sector include Deluxe Corp. (DLX), WD-40 Company (WDFC) and Pitney Bowes Inc. (PBI). All these stocks carry a Zacks Rank #2 (Buy).
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