Avery; Long-Term Story Positive, Near-Term Headwinds Remain

On Dec 11, 2014, we issued an updated research report on Avery Dennison Corporation (AVY - Analyst Report), producer of pressure-sensitive materials, and variety of tickets, tags, labels and other converted products.

Avery Dennison Corporation reported adjusted earnings of 77 cents per share in the third quarter of 2014, up 11.6% from 69 cents earned in the year-ago quarter. Total revenue increased 4% 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 grow the top line of this high return business at a 4% to 5% level organically.

The company continues to drive growth by expanding in emerging markets and developing innovative products to gain market share. In addition to delivering savings from the European restructuring, Avery is taking actions to improve variable margins and product mix in the 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.

Even though top line at the Retail Branding Information Solutions segment declined, the 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. RFID delivered 20% growth during the third quarter. Adoption trends remain favorable and RFID is expected to be a long term-driver, growing more than 20% annually.

Avery expects to continue progressing through 2018, projecting organic sales growth in the range of 4% to 5%. Operating margin is expected to range between 9% and 10%, while adjusted earnings per share (EPS) growth will be in the range of 12% to 15%. 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.

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%, helped 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.

While the long-term story for Avery Dennison looks promising,  factors like its 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, upgrades to operations), are 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 slowdown in China remain concerns for the Retail Branding Information Solutions segment.

In line with this, Avery trimmed the upper end of its 2014 adjusted earnings per share outlook, which was previously projected in the $3.00 $3.10 band, to range between $3.00 $3.05. 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

At present, Avery Dennison carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the same industry include ACCO Brand Corporation (ACCO - Snapshot Report), Multi-Color Corp. (LABL - Snapshot Report) and ARC Document Solutions, Inc. (ARC - Snapshot Report). While ACCO and Multi-Color Corp. sport a Zacks Rank #1 (Strong Buy), ARC Document Solutions carries a Zacks Rank #2 (Buy).

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