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Why Is Avery Dennison (AVY) Down 8.1% Since Last Earnings Report?

Zacks Equity Research

It has been about a month since the last earnings report for Avery Dennison (AVY). Shares have lost about 8.1% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Avery Dennison due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Avery Dennison Q1 Earnings Beat, Sales Lag Estimates

Avery Dennison reported adjusted earnings of $1.48 per share in first-quarter 2019, surpassing the Zacks Consensus Estimate of $1.46. The figure also increased around 2.7% year over year.
 
Including one-time items, the company posted net loss of $1.74 per share as against the year-ago quarter’s earnings per share of $1.40.

Total revenues declined 2% year over year to $1.74 billion, missing the Zacks Consensus Estimate of $1.75 billion. Organic sales growth was 2.4% in the reported quarter.

Cost of sales in the quarter edged down 1.5% year over year to $1.3 billion. Gross profit decreased 3.7% year over year to $465 million. Gross margin slipped to 26.7% from 27.2% the prior-year quarter.

Marketing, general and administrative expenses came in at $276 million compared with $295 million reported in the year-ago quarter. Adjusted operating profit came in at $189 million compared to $188 million recorded in the prior-year quarter. Adjusted operating margin inched up to 10.9% from the year-earlier quarter’s 10.6%.

Segmental Performance

Revenues in the Label and Graphic Materials segment declined 3.3% year over year to $1,178 million. On an organic basis, sales grew 1.4%. Adjusted operating profit decreased 6.8% year on year to $147 million.

Revenues in the Retail Branding and Information Solutions segment jumped 3.2% year over year to $398.3 million. On an organic basis, sales were up 7%. The segment’s adjusted operating income increased 25% to $49.4 million.

The Industrial and Healthcare Materials segment reported net sales of $163.5 million, dropping 5% from the prior-year quarter. The segment reported adjusted operating income of $15.5 million compared with $13.0 million recorded in the comparable quarter last year.

Financial Updates

Avery Dennison had cash and cash equivalents of $225.7 million at the end of the first quarter, up from $187.5 million reported at the end of the prior-year quarter. The company generated $35 million in cash from operating activities in the reported quarter compared with $16 million in the year-earlier period.

During the Jan-Mar quarter, Avery Dennison repurchased 0.9 million shares for a total cost of $89 million. The company’s share count decreased 0.4 million in the quarter.

Avery Dennison’s long-term debt increased to $1,760 million as of Mar 30, 2019, compared with $1,342.7 million as of Mar 31, 2018.

Cost-Reduction Activities

Avery Dennison realized approximately $5 million in pre-tax savings from restructuring in the first quarter. The company incurred pre-tax restructuring charges of approximately $11 million.
 
U.S. Pension Plan Termination

Avery Dennison has begun the termination process of the Avery Dennison Pension Plan (ADPP) — a tax-qualified U.S. defined benefit plan. On Mar 21, the company settled its liabilities associated with this plan. The settlement resulted in $447 million of pretax charges, partly offset by tax benefits of $180 million. The company contributed around $7 million of cash to the ADPP during the first quarter to cover costs associated with the settlement of these liabilities.
 
Guidance
 
For 2019, Avery Dennison maintained its adjusted earnings per share guidance of $6.45-$6.70. 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.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

Currently, Avery Dennison has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Avery Dennison has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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