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Avery Dennison (AVY) Up 43% YTD: What's Driving the Rally?

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Shares of Avery Dennison Corporation (AVY - Free Report) have been gaining on forecast-topping first-quarter 2021 results and rising demand for essential categories amid the coronavirus pandemic. The stock has gained 43%, year to date, outperforming the industry’s growth of 32.8%. The company’s focus on growing its high-value categories led by specialty labels, productivity initiatives, as well as cost-control actions has also been contributing to this price rally.
 

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Let’s delve deeper and analyze the factors driving the stock.

Earnings & Sales Top Estimates in Q1

In April, the company reported first-quarter adjusted earnings of $2.40 per share, surpassing the Zacks Consensus Estimate of $2.01. The bottom line also improved 45% year over year on significant margin expansion across all of its segments and the company’s cost-saving actions. Total revenues of $2.05 billion also beat the Zacks Consensus Estimate of $1.92 billion and increased 8.8% year over year.

Earnings Surprise History

The company has a trailing four-quarter average earnings surprise of 15.4%.

Driving Factors

Labelling of non-durable consumer goods like food, beverage, home and personal care products account for around 40% of Avery Dennison’s revenues. The company has been witnessing soaring demand for these products amid the pandemic. Over the long run, increasing demand from emerging markets on the back of rising middle class, and the consequent surge in demand for packaged goods and shift in labelling technology to pressure-sensitive materials will fuel the company’s growth. Apart from this, around 15% of its revenues is tied to logistics and shipping, which will be aided by rise in e-commerce activities.

The company’s Label and Packaging Materials segment is also well poised for growth on solid top-line performance and continued margin expansion, volume improvement, focus on high-value categories led by specialty labels, contributions from productivity initiatives as well as pandemic-driven demand for essential products.

Avery Dennison will benefit from its rapidly-growing high-value product categories, such as specialty labels and Radio-frequency identification (RFID). Continued strength in RFID and external embellishments will boost the Retail Branding and Information Solutions (RBIS) segment. Besides, the company is focused on investing in digital identification technologies. To that end, it has acquired a small software start-up ZippyYum and rolled out a Connected Product Cloud Platform start-up atma.io. The Industrial and Healthcare Materials segment is gaining from the rebound in demand for industrial products and focus on investments.

Given these factors, Avery Dennison now expects earnings per share between $8.40 and $8.80 in 2021 compared with the prior guidance of $7.65-$8.05. The mid-point of the guidance reflects year-over-year growth of 21%.

Avery Dennison has also undertaken temporary cost-containment actions to negate the impact of waning demand in some of the company’s businesses due to the pandemic. The company realized $19 million in pre-tax savings from restructuring in the first quarter. Avery Dennison anticipates incremental savings from restructuring actions, net of transition costs of roughly $70 million in the current year.

Positive Growth Projections

The company’s earnings estimate for the current year is pegged at $8.59, suggesting year-over-year growth of 20.9%.

Zacks Rank & Other Stocks to Consider

Avery Dennison currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

A few other top-ranked stocks in the industrial products sector are Tennant Company (TNC - Free Report) , Encore Wire Corporation (WIRE - Free Report) and Arconic Corporation . All of these stocks sport a Zacks Rank #1, at present.

Tennant has an expected earnings growth rate of 49.5% for the current fiscal year. The company’s shares have gained around 18% year to date.

Encore Wire has an estimated earnings growth rate of 49.5% for the current fiscal year. Year to date, the company’s shares have rallied nearly 36%.

Arconic has a projected earnings growth rate of 447% for the current fiscal year. The stock has appreciated around 21% so far this year.

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