Reasons to Add Avery Dennison (AVY) Stock to Your Portfolio
Avery Dennison Corporation AVY is benefiting from surging demand for essential categories amid the ongoing coronavirus pandemic. Focus on high-value categories led by specialty labels, and contributions from productivity initiatives will also driving results. Further, restructuring and cost saving actions and a strong balance sheet have been contributing to growth.
The company’s shares have gained 15.1% so far this year against the industry’s decline of 9.2%.
The company currently carries a Zacks Rank #2 (Buy) and a VGM Score of B. Our research shows that stocks with a VGM Score of A or B, when combined with a Zacks Rank #1 (Strong Buy) or 2, offer the best investment opportunities.
Factors Favoring Avery Dennison
Q3 Earnings Beat: Avery Dennison reported third-quarter 2020 adjusted earnings of $1.91 per share, surpassing the Zacks Consensus Estimate of $1.54 by a margin of 24%. The bottom line also improved 15% year over year driven by enhanced demand across all segments and cost saving actions.
Earnings Surprise History: The company beat estimates in each of the trailing four quarters, the average surprise being 12.8%.
Return on Equity (ROE): Avery Dennison’s trailing 12-month ROE of 45% reinforces its growth potential. The company’s ROE is higher than the industry’s ROE of 12%, highlighting its efficiency in utilizing shareholder funds.
Positive Estimate Revision Activity: The Zacks Consensus Estimate for the company’s earnings estimates for the fourth quarter and 2020 have moved north by 19% and 12%, respectively, over the past 30 days. Also, earnings estimates for the next year have improved 9% in the past few days.
Positive Growth Estimates: The Zacks Consensus Estimate for fiscal 2020 is currently pegged at $6.86, indicating year-over-year growth of 4%. The same for fiscal 2021 is $7.29, suggests an improvement of 6.3% from the prior-year reported figure.
The stock has an estimated long-term earnings growth rate of 6.7%.
Growth Drivers
Around 40% of the company’s revenues stem from labelling of non-durable consumer goods like food, beverage, home and personal care products. Demand for these products has been strong amid the pandemic. In the long term, growing demand from emerging markets on the back of rising middle class, and the consequent surge in demand for packaged goods and shift in labelling technology to pressure-sensitive materials will drive growth. Also, around 15% of the company’s revenues is tied to logistics and shipping, which will be sustained by growth in e-commerce activities.
The company’s Label and Packaging Materials segment is well poised for growth in the current year, aided by demand for essential products amid the pandemic. Focus on high-value categories led by specialty labels and contributions from productivity initiatives will also aid growth.
The company will benefit from its rapidly growing high-value product categories, such as specialty labels and Radio-frequency identification (RFID). Continued strength in RFID and external embellishments will drive the Retail Branding and Information Solutions (RBIS) segment. The segment’s global presence is providing it a competitive edge amid the coronavirus pandemic.
Avery Dennison continues to increase investments to drive growth both organically and through acquisitions with higher spending for business development and R&D. In sync with this, the company acquired Smartrac’s Transponder (RFID Inlay) Division. The buyout is likely to bolster its rapidly-growing Intelligent Labels platform across end markets and customers within the industrial and retail segments. The deal will generate greater revenues with RFID business anticipated to grow 15-20% annually over the long term.
Along with strategic restructuring efforts, Avery Dennison has undertaken temporary actions to reduce costs to negate the impact of weak demand in some of its business due to the COVID-19 pandemic. The company anticipates incremental savings from restructuring actions, net of transition costs, between $60 million and $70 million during 2020. For 2021, the company expects carryover savings (net of transition costs) of approximately $70 million in 2021. Additionally, Avery Dennison is targeting net temporary savings of approximately $150 million in 2020.
Other Stocks to Consider
Some other top-ranked stocks in the Industrial Products sector are Crown Holdings, Inc. CCK, iRobot Corporation IRBT and SiteOne Landscape Supply, Inc. SITE. While Crown Holdings and iRobot sport a Zacks Rank #1, SiteOne Landscape carries a Zacks Rank #2, at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
Crown Holdings has a projected earnings growth rate of 11.7% for fiscal 2020. Over the past year, the company’s shares have appreciated 30% year to date.
iRobot has an estimated earnings growth rate of 18.8% for the ongoing year. Year to date, the company’s shares have gained 41%.
SiteOne Landscape has an expected earnings growth rate of 28.6% for 2020. So far this year, the stock has climbed 41%.
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