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Balanced Risk Reward for Avery Dennison

Zacks Equity Research

On Jun 13, 2014, we issued an updated research report on Avery Dennison Corporation (AVY), producer of pressure-sensitive materials, and a variety of tickets, tags, labels and other converted products.

Avery Dennison reported adjusted earnings of 65 cents per share in the first quarter of 2014, up 10% from 59 cents earned in the year-ago quarter. Net sales grew approximately 3% on reported and organic basis in the quarter to $1.55 billion, increasing for the 8th consecutive quarter. Organic growth was realized in both the Pressure-Sensitive Materials (:PSM) segment which grew 6% and the Retail Branding and Information Solutions (:RBIS) segment that inched up 2%.

The PSM segment sales will rise in 2014 due to higher volumes and higher prices and a 1% contribution from an additional week. Growth will be driven by the emerging markets – China, India and South America – particularly in film labels for consumer products and food & beverages, followed by modest increase in North America as well the European regions.

The RBIS segment continues to benefit from increased demand from European retailers & brands. 20 of the top 30 retailers in the U.S. are now testing or already using RFID (radio-frequency identification). Several new installations are taking place in Europe as well. RFID delivered 25% growth during 2013 and should continue to rise for the next few years.

Avery reiterated its full-year 2014 adjusted earnings in the range of $2.90 to $3.20 per share. The company remains focused on achieving its sales growth target of 3% to 5% and net income growth of 10–15% by 2015. Earnings growth is expected to be achieved through continued developments in emerging markets and productivity improvements.

Avery has targeted continued strong progress 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 PSM segment, Avery targets 4–5% organic sales growth for the 2013–2018 period, aided by market share gains, emerging market growth, accelerated growth in graphics, and performance tapes and innovation-led growth 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 of Avery Dennison looks promising, the reasons weighing the company down currently are its Vancive Medical Technologies unit which is currently operating at a loss. This is due to investment in new growth platforms (research and development, marketing, upgrades to operations). Even though it is expected to deliver profits in 2015, it will continue to generate losses in 2014.

Moreover, Avery recently announced its plans to close an old manufacturing plant in the Netherlands and consolidate operations and invest in new production capabilities elsewhere to improve the competitiveness of the European Graphics business. Even though this restructuring plan will lead to savings in 2015, it will be a modest headwind to earnings in 2014.

In the second quarter, PSM results are likely to be affected by higher raw material costs. The RBIS segment will have a tougher time beating its year-ago volume growth of 8%.

Other Stocks to Consider

At present, Avery Dennison carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the same industry include Multi-Color Corp. (LABL), ARC Document Solutions, Inc. (ARC) and Cenveo Inc. (CVO). While Multi-Color Corp. sports a Zacks Rank #1 (Strong Buy), ARC Document Solutions and Cenveo carry a Zacks Rank #2 (Buy).

Read the Full Research Report on AVY
Read the Full Research Report on CVO
Read the Full Research Report on ARC
Read the Full Research Report on LABL

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