Shares of Avery Dennison Corporation (AVY) scaled a new 52-week high of $52.83 on Dec 26 and eventually closed at $52.62. The stock price appreciation came on the back of strong third-quarter results, expected synergies from expansion in emerging markets, introduction of innovative products, savings from the European restructuring and positive long-term outlook.
This Pasadena, CA-based manufacturer of pressure-sensitive materials has a market cap of $4.8 billion. Meanwhile, average volume of shares traded over the last three months is approximately 976K. Avery has delivered one-year return of about 6.8% and year-to-date return of around 7.7%. The company has outperformed the Zacks Consensus Estimate in three out of four trailing quarters with an average positive surprise of 1.70%.
Strengths of Avery Dennison
Shares of Avery started trending upward since the company reported third-quarter 2014 results on Oct 24, with 11.6% year-over-year growth in adjusted earnings to 77 cents per share. Total revenue increased 4% in the quarter to $1.56 billion from $1.50 billion in the prior-year quarter.
On an organic basis, sales grew 3% year on year, increasing for the ninth consecutive quarter. In the Pressure-Sensitive Materials segment, organic growth was 5%. Avery’s strategy in the Pressure Sensitive Materials segment is to boost revenues at this high-return business at a 4% to 5% level organically.
Avery repurchased 5 million shares in the third quarter at an aggregate cost of $247 million. The company realized approximately $7 million of savings from restructuring. Avery’s cash flow from operating activities for the period of nine months ended Sep 27, 2014 was $200 million, substantially up from $95.7 million in the year-ago period.
Avery initiated a new restructuring program in 2014, primarily related to the consolidation of certain European operations. Avery anticipates approximately $38 million in annualized savings from these restructuring actions, of which around $12 million is expected to be realized in 2014 and the rest in 2015. With relentless focus on cost-cutting and portfolio optimization, earnings growth trajectory at Avery should continue over the next few years.
Avery continues to drive growth by expanding in emerging markets and developing innovative products to gain market share. Apart from delivering savings from the European restructuring, Avery 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. Avery is also 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 both RFID (radiofrequency identification) and share gain across most market segments. 20 of the top 30 retailers in the U.S. are now testing or already using RFID. Several new installations are taking place in Europe as well. Adoption trends remain favorable and RFID is expected to be a long term-driver, growing more than 20% annually.
The RBIS 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. Avery expects the RFID industry to grow from approximately 3 billion units in 2013 to 9 billion units by 2018.
For the Pressure Sensitive Materials segment, Avery 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.
Avery projects organic sales growth in the range of 4% to 5%. Operating margin is expected to range between 9% and 10%, while adjusted earnings growth will likely be in the band of 12% to 15%. Further the falling oil prices will facilitate Avery’s growth.
At present, Avery carries a Zacks Rank #3 (Hold).
Other Stocks to Consider
Some better-ranked stocks in the same industry include ACCO Brand Corporation (ACCO), AO Smith Corp. (AOS) and ARC Document Solutions, Inc. (ARC). All these stocks carry a Zacks Rank #2 (Buy).
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