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Momentum

Shares and earnings estimates of Avery Dennison Corporation (AVY - Analyst Report) have been trending higher on the back of a solid third quarter - the best so far in 2012 in terms of earnings growth and earnings surprise. This producer of pressure-sensitive materials and office products hit its new 52-week high on November 26, 2012, and has seen its shares soar roughly 23% year-to-date.

This Zacks Rank #1 (Strong Buy) stock looks to continue its earnings momentum thanks to its increased portfolio focus on its two core businesses: Pressure-Sensitive Materials and Retail Branding and Information Solutions units and their respective leading global market position, well-established brands, broad geographic diversity, savings from aggressive cost cutting and restructuring actions and expansion in emerging markets.

Strong Earnings Beat in 3Q

Avery Dennison witnessed 77% annual growth in its adjusted earnings to 53 cents per share in the third quarter, comfortably beating the Zacks Consensus Estimate of 45 cents. Revenues dipped 0.8% year-over-year to $1.49 billion but were ahead of the Zacks Consensus Estimate of $1.487 billion. On an organic basis, revenues increased approximately 6% driven by higher volume.

Gross margin expanded 180 basis points to 26.3%. Adjusted operating margin improved 110 basis points to 6.6%, attributed to higher volume and productivity initiatives which helped offset higher employee-related expenses, the impact of changes in product mix, and restructuring costs.

The company raised its adjusted earnings guidance to a range of $2.00 to $2.05 per share from previous guidance of $1.90 to $2.05.

Earnings Estimates Rising

For fiscal 2012, five out of six estimates have been revised higher in the last 60 days, pushing the Zacks Consensus Estimate upward by 5% to $2.03 a share. Two estimates out of six have moved higher for fiscal 2013 over the same period. The Zacks Consensus Estimate for the fiscal increased 3% to $2.45, representing year-over-year growth of 20.8%.

Valuation

Shares of Avery Dennison currently trade at a forward P/E of 17.1x, at 42% premium to the peer group average of 12.0x. However, its trailing twelve months P/E of 18.0x is on par with the peer group average. The price-to-book of 2.2x is above the peer group average of 1.7x, and it price-to-sales of 0.6x is on par with the peer group average.

Avery Dennison has a 1-year ROE of 12.4%, higher than its peer group average of 11.9%, reflecting efficient capital deployment.

Sound Technicals and Healthy Performance

Avery Dennison is currently trading above its 50- and 200-day moving averages, which stand at $32.34 and $30.09, respectively. Interestingly, following a golden crossover in July 2012, the 50-day moving average continues to read higher than the 200-day moving average, manifesting the bullish trend.

On the performance front, Avery Dennison has outperformed the S&P 500 over the past year and has delivered a year-to-date return of 25% versus 17% for the benchmark.

About Avery Dennison

Incorporated in 1977, Pasadena, California-based Avery Dennison manufactures pressure-sensitive materials, and a variety of tickets, tags, labels other converted products. Avery Dennison has a market cap of roughly $3.5 billion and operates over 200 manufacturing and distribution facilities encompassing more than 60 countries with over 30,000 employees.

Its products are sold under the Avery, Avery Dennison, Avery Graphics and Fasson brands. Its clientele is spread across the U.S., Europe, Asia, Latin America and other regions. The company operates through the Pressure-Sensitive Materials unit, the Retail Branding and Information Solutions unit and the Other Specialty Converting Businesses unit. It has decided to divest its Office and Consumer Products unit and focus on its core businesses.

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