Avery Dennison Corporation AVY remains poised for growth, backed by focus on pricing actions, restructuring activities and an encouraging 2019 outlook. 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, resulting in an average positive earnings surprise of 2.11%. 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’s strong presence in emerging markets, acquisitions and organic growth drove the company’s earnings during the March-end quarter. The company continues to register stellar top-line growth, margin expansion and earnings improvement. In sync with this, the company maintained its adjusted earnings per share guidance of $6.45-6.70 for 2019, reflecting growth of 6-11% over the $6.06 earned in 2018.
For the current year, including the impact of the pension-settlement charge, Avery Dennison raised its 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.
Positive Growth Projections
The Zacks Consensus Estimate for Avery Dennison’s 2019 EPS is currently pegged at $6.55, reflecting projected 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%.
Avery Dennison’s trailing 12-month EV/EBITDA ratio is 9.8, while the industry's average trailing 12-month EV/EBITDA is 12.7. Consequently, the stock is cheaper at this point based on the ratio.
Return on Equity (ROE)
Avery Dennison’s trailing 12-month ROE of 54.3% reinforces its growth potential. The company’s ROE is higher than the ROE of 24.3% for the industry, highlighting its efficiency in utilizing shareholders’ funds.
Over the past year, Avery Dennison’s shares have gained 14.5%, outperforming the industry’s growth of 5.9%.
Avery Dennison continues to focus on four overarching priorities, comprising driving outsized growth in high-value product categories, boosting profitability in base businesses, relentlessly pursuing productivity improvement and a disciplined capital-management approach. This apart, it 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 stellar top-line growth and continued margin expansion, fueled 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 its LGM segment’s European footprint will drive higher returns and boost the company’s competitiveness.
The company will also benefit from its fast-growing high-value product categories, such as specialty labels and Radio-frequency identification (RFID), delivering annual growth of more than 15-20%. Avery Dennison anticipates 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 is confident about meeting growth and margin targets for Industrial and Healthcare Materials (IHM) segment over the long haul. It is likely to meet its target of 4-5% plus organic growth for the segment over the long term and anticipates to witness the company’s margin gradually expand by 2021.
Few Hurdles to Counter
A lackluster China automotive market dampened Avery Dennison’s IHM segment sales, year over year, in the first-quarter 2019. The company forecasts softness in the China automotive market to prevail in the second quarter as well. Furthermore, due to strengthening of the U.S. dollar, currency translation might have a larger impact on Avery Dennison’s results in the June-end quarter.
Investors might want to hold on to the stock, at present, as it has ample prospects of outperforming peers in the near future.
Avery Dennison Corporation Price and Consensus
Avery Dennison Corporation price-consensus-chart | Avery Dennison Corporation Quote
Stocks to Consider
A few better-ranked stocks in the Industrial Products sector are Graphic Packaging Holding Company GPK, Roper Technologies, Inc. ROP and Valmont Industries, Inc. VMI, each sporting a Zacks Rank #1, at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
Graphic Packaging has an estimated earnings growth rate of 4.9% for the ongoing year. The company’s shares have gained 0.7% over the past month.
Roper Technologies has an expected earnings growth rate of 9.4% for the current year. The stock has appreciated 2.5% in the past month.
Valmont Industries has a projected earnings growth rate of 12.6% for 2019. The stock has gained 7% in a month’s time.
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