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On Jun 27, we maintained our Outperform recommendation on Avery Dennison Corporation (AVY - Analyst Report), a pressure-sensitive materials producer and provider of wide variety of information and brand management solutions. The reiteration was based on expected benefits from restructuring initiatives and divestiture of its underperforming Office and Consumer Products unit.

Why Reiterated?

Avery’s adjusted earnings increased 37% year over year to 59 cents per share in first-quarter 2013 and revenues rose 4% year over year to $1.5 billion.  For 2013, Avery expects adjusted earnings in the range of $2.40 to $2.75 per share. Free cash flow from continuing operations is expected between $275 million and $315 million in 2013.

In order to attain its financial targets of double-digit earnings growth and higher returns, Avery has aggressively implemented a restructuring program to reduce costs across all business segments. The program is anticipated to be completed by mid-2013. Avery expects to save more than $100 million annually by leveraging this program by mid-2013.

Avery’s Office and Consumer Products segment has been struggling for a long time due to weak end-market demand and cut-throat competition in the label category. In Jan 2013, Avery agreed to divest the segment along with its Designed and Engineered Solutions businesses to CCL Industries Inc., a global leader in specialty packaging solutions.

The net sale proceeds of approximately $400 million will be utilized to repurchase shares and make an additional pension contribution. With the divestiture of the weaker Office Products business, Avery will be able to focus on its market-leading, pressure-sensitive materials business and Retail Branding and Information Solutions segment.

Avery remains committed to its long-term targets (by 2015) of sales growth in the range of 3% to 5% and net income growth of 10-15%. Earnings per share growth of 15-20% is expected to be achieved through continued growth in emerging markets and productivity improvements.

In addition, the company expects to generate free cash flow of around $1.2 billion - $1.4 billion over the 2012-2015 timeframe or $1.6 billion -$1.8 billion (including $400 million from the abovementioned sale). This will be utilized toward - $150-300 million in debt repayment, more than $200 million for acquisitions and $1-1.5 billion will be returned to shareholders over the period in combined share buyback and dividends.
Other Stocks to Consider

Other stocks in the same industry with favorable Zacks rank are CompX International Inc. , Energizer Holdings Inc. (ENR - Analyst Report) and Bemis Company, Inc. (BMS - Analyst Report), all carrying a Zacks Rank #2 (Buy).

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