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Bull of the Day

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Avery Dennison Corporation (AVY - Analyst Report) completed a triple play in the fourth quarter: a positive earnings surprise, a positive sales surprise, and strong management guidance. This prompted analysts to revise their estimates higher for both 2013 and 2014, sending the stock to a Zacks Rank #1 (Strong Buy) stock.

Although shares have risen more than 10% off the strong quarter, valuations still look very reasonable. So shares of Avery Dennison have plenty of room to continue marching higher.

Company Description

Avery Dennison manufactures labeling and packaging materials for a wide variety of industries around the globe. It reports its results in three segments:

Pressure-sensitive Materials: 71% of total sales
Retail Branding & Information Solutions: 25%
Other Specialty Converting Businesses: 4%

Pressure-sensitive materials consist primarily of papers, plastic films, metal foils and fabrics, which are coated with special adhesives, and then laminated with specially coated backing papers and films. These label and packaging materials are sold worldwide to label printers and converters for labeling, decorating, fastening, electronic data processing and special applications in the home and personal care, beer and beverage, durables, pharmaceutical, wine and spirits, and food market segments.

The Retail Branding & Information Solutions segment makes a wide variety of brand identification and information management products for retailers, apparel manufacturers, distributors and industrial customers around the globe. Its brand identification products include woven and printed labels, graphic tags and barcode tags, and its information management products include price tickets, carton labels, RFID tags and printing applications.

Avery Dennison was founded in 1935 and is headquartered in Pasadena, California. It has a market cap of $4.0 billion.

Solid Fourth Quarter Results

Avery Dennison delivered better-than-expected Q4 results on January 30. Earnings per share came in at 54 cents, well ahead of the Zacks Consensus Estimate of 49 cents. It was a 50% increase over the same quarter in 2011.

Net sales rose 5% to $1.532 billion, beating the Zacks Consensus Estimate of $1.486 billion. Organic sales growth was even better at 7%. The Pressure-sensitive Materials segment saw organic top-line growth of 6% while sales in Retail Branding & Information Solutions jumped 10%, driven by increased demand from U.S. and European retailers and brands, including accelerating RFID adoption.

Meanwhile, the adjusted operating margin expanded 170 basis points to 6.6%.

Bullish Guidance

Following strong Q4 results, management provided encouraging guidance for 2013. The company expects adjusted EPS from continuing operations of $2.40 to $2.80 in 2013, which prompted analysts to revise their estimates higher.

The Zacks Consensus Estimate for 2013 is now $2.57, up from $2.45 before the Q4 release. This represents 23% growth over 2012 EPS. The 2014 consensus increased too, rising 15 cents to $2.86. This corresponds with 12% annual EPS growth.

It is a Zacks Rank #1 (Strong Buy) stock.

Valuation

Shares of AVY are up more than 10% since the Q4 release. But the valuation picture still looks reasonable. The stock is trading at 15x 12-month forward estimates, which is essentially in-line with its 10-year median.

Its also trading at just 9x free cash flow, well below its historical multiple of 16x. The stock is also trading at 2.4x book value, which is below its historical multiple of 3.4x.

The Bottom Line

With strong earnings momentum, solid growth potential and reasonable valuation, this Zacks Rank #1 stock offers a lot to like.

Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research and Editor of the Income Plus Investor service.

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