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Avery Dennison Shares Up 26% YTD: What's Driving the Rally?

Zacks Equity Research

Shares of Avery Dennison Corporation AVY have gained 26.5% year to date, spurred by its impressive earnings performance in March-end quarter and an encouraging 2019 outlook, as well as expected benefits from pricing actions and restructuring activities. Also, the company’s acquisitions and robust presence in emerging markets will be conducive to its growth.
Avery Dennison, a Zacks Rank #3 (Hold) stock, has a market cap of roughly $9.4 billion. The stock has a long-term expected earnings per share growth rate of 8.30%.

The company outpaced the Zacks Consensus Estimate in three of the trailing four quarters, the average positive earnings surprise being 2.11%. The stock’s 26.5% year-to-date rise has outperformed the industry’s growth of 22.9%.

Let’s delve deeper and analyze the reasons behind the company’s impressive price performance and find out if there is room for further appreciation:

Earnings Beat Estimates in Q1: Avery Dennison’s first-quarter 2019 adjusted earnings per share of $1.48 surpassed the Zacks Consensus Estimate and increased around 2.7% year over year.
Strong Outlook: For the ongoing year, Avery Dennison maintained its adjusted earnings per share guidance of $6.45-6.70, reflecting growth of 6-11% over the $6.06 earned in 2018. Including the impact of the pension-settlement charge, Avery Dennison raised the earnings per share guidance to $3.10-$3.35 from the prior view of $2.70-$2.95, due to lower-than-expected pension-settlement charges.
Healthy Growth Projections: The Zacks Consensus Estimate for Avery Dennison’s 2019 earnings is currently pegged at $6.55, reflecting year-over-year growth of 8.09%. The same for 2020 is pinned at $7.16, indicating a year-over-year rise of 9.2%.
Growth Drivers in Place: Avery Dennison continues to deliver stellar top-line growth, margin expansion and double-digit adjusted EPS improvement. This is backed by acquisitions, organic growth and a strong presence in emerging markets.
The company continues to focus on four overarching priorities, comprising driving outsized growth in high-value product categories, growing profitability in base businesses, relentlessly pursuing productivity improvement, and a disciplined capital-management approach. This apart, it also continues to combat raw material inflation with pricing actions.
The Label and Graphic Materials (LGM) segment is Avery Dennison’s largest and highest-return business. This segment will maintain its momentum of solid top-line growth and continued margin expansion, aided by growth in emerging markets, focus on high-value categories (including specialty labels), as well as contributions from productivity initiatives. Furthermore, Avery Dennison’s completion of restructuring actions associated with the consolidation of the European footprint of its LGM segment will drive higher returns for the segment and boost the company’s competitiveness.
It will also benefit from its fast growing high-value product categories, such as specialty labels and Radio-frequency identification (RFID). The company also anticipates RFID to deliver annual growth of more than 15-20%. Avery Dennison expects to witness strong engagement among apparel retailers and brands, as well as promising early-stage developments in other end markets. Moreover, the company increases its investments to fuel growth with higher spending for business development and R&D.
Avery Dennison remains confident for its target of 4-5% plus organic growth for the Industrial and Healthcare Materials (IHM) segment over the longer term and expects to witness the company’s margin gradually expand by 2021. The segment will benefit from the Yongle, Finesse and Mactac acquisitions. Thus, the company is confident about meeting growth and margin targets for this business over the long haul.

Avery Dennison Corporation Price and Consensus

Avery Dennison Corporation Price and Consensus

Avery Dennison Corporation price-consensus-chart | Avery Dennison Corporation Quote

Key Picks

A few better-ranked stocks in the Industrial Products sector are Chart Industries, Inc. GTLS, Lawson Products, Inc. LAWS and Harsco Corporation HSC, each sporting a Zacks Rank #1 (Strong Buy), at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Chart Industries has an estimated earnings growth rate of 52.9% for the ongoing year. The company’s shares have gained 10.1%, in the past year.

Lawson Products has an expected earnings growth rate of 24.5% for the current year. The stock has appreciated 45.5% in a year’s time.

Harsco has a projected earnings growth rate of 9.1% for 2019. The company’s shares have gained 6.5%, over the past year.

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