Avery Dennison Corporation AVY remains poised for growth backed by acquisitions, strong presence in emerging markets, an encouraging 2019 outlook, focus on pricing actions and restructuring activities. However, its performance will be affected by a lackluster China automotive market and negative impact of currency translation.
The company outpaced the Zacks Consensus Estimate in three of the trailing four quarters, the average positive earnings surprise being 1.10%. It has an estimated long-term earnings growth rate of 8.30%.
The company currently carries a Zacks Rank #3 (Hold) and has a VGM Score of B. Our research shows that stocks with a VGM Score of A or B, combined with a Zacks Rank #1 (Strong Buy) 2 (Buy) or 3, offer the best investment opportunities.
Below, we briefly discuss the company’s potential growth drivers and possible headwinds.
Factors Favoring Avery Dennison
Avery Dennison continues to register strong top-line growth, margin expansion and double-digit adjusted earnings improvement backed by acquisitions, organic growth and strong presence in emerging markets. In sync with this, its adjusted earnings per share are expected to be $6.50-$6.65 for 2019, suggesting growth of 6-11% from the 2018 reported figure. Including the impact of the pension settlement charge, the company’s earnings per share guidance is at $3.15-$3.30.
Over the past three months, Avery Dennison’s shares have gained 1.8% against the industry’s decline of 4.3%.
Return on Equity (ROE)
Avery Dennison’s trailing 12-month ROE of 52.7% reinforces its growth potential. The company’s ROE is higher than the ROE of 20.7% for the industry, highlighting its efficiency in utilizing shareholders’ funds.
Strong Earnings Growth Projections
The Zacks Consensus Estimate for the company’s earnings for the ongoing year is currently pegged at $6.54, suggesting growth of 7.92% from the year-ago reported figure. The same for 2020 is stands at $7.09, indicating rise of 8.35%.
Avery Dennison focuses on four overarching priorities — driving growth in high-value product categories, enhancing profitability in base businesses, relentlessly pursuing productivity improvement and a disciplined capital management approach.
The company’s Label and Graphic Materials segment will maintain its stellar top-line growth momentum and continued margin expansion, aided by growth in emerging markets, focus on high-value categories (including specialty labels) and contributions from productivity initiatives. Furthermore, the completion of restructuring actions associated with the consolidation of its European footprint will bring in higher returns and boost the segment’s competitiveness.
The company will also benefit from its fast-growing high-value product categories such as specialty labels and Radio-frequency identification. Avery Dennison anticipates strong engagement among apparel retailers and brands as well as promising early-stage developments in other end markets. Moreover, the company increased its investments to fuel growth with higher spending for business development and R&D.
Avery Dennison is confident about meeting its growth and margin targets for the Industrial and Healthcare Materials (IHM) segment over the long haul. It is likely to meet the target of 4-5% plus organic growth for the segment over the long term and anticipates witnessing gradual margin expansion by 2021.
Few Hurdles to Counter
A lackluster China automotive market is hampering Avery Dennison’s IHM segment sales. Furthermore, due to strengthening of the U.S. dollar, currency translation might have a larger impact on Avery Dennison’s upcoming results.
Investors might want to hold on to the stock at present, as it has ample prospects of outperforming peers in the near future.
Stocks to Consider
A few better-ranked in the Industrial Products sector are Albany International Corporation AIN, AGCO Corporation AGCO and UFP Technologies, Inc. UFPT While Albany International sports a Zacks Rank #1 (Strong Buy), AGCO Corp and UFP Technologies carry a Zacks Rank of 2 (Buy), at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
Albany International has an estimated earnings growth rate of 33.85% for 2019. The company’s shares have rallied 40.1% year to date.
AGCO Corp has a projected earnings growth rate of 11.2% for the current year. The stock has gained 18.4% so far this year.
UFP Technologies has an expected earnings growth rate of 8.10% for the ongoing year. The stock has appreciated 31.5% in the year-to-date period.
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