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Here's Why Hold Strategy is Apt for Avery Dennison Stock

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Avery Dennison Corporation (AVY - Free Report) remains well poised for growth on surging demand for essential categories in the Label and Packaging Materials segment amid the ongoing coronavirus pandemic. Focus on high-value categories led by specialty labels, and contributions from productivity initiatives will also bolster results. Further, restructuring and cost saving actions and a strong balance sheet will contribute to growth.

The stock has an estimated long-term earnings growth rate of 6.2%. The company’s shares have lost 0.2% over the past year compared with the industry’s decline of 13.5%.

The company currently carries a Zacks Rank #3 (Hold) and a VGM Score of B. Our research shows that stocks with a VGM Score of A or B, when combined with a Zacks Rank #1 (Strong Buy) 2 (Buy) or 3, offer the best investment opportunities.

Factors Favoring Avery Dennison

Earnings Surprise History

The company beat estimates in each of the trailing four quarters, the average surprise being 7.7%.

Return on Equity (ROE)

Avery Dennison’s trailing 12-month ROE of 46% reinforces its growth potential. The company’s ROE is higher than the industry’s ROE of 14%, highlighting its efficiency in utilizing shareholder funds.

Positive Estimate Revision Activity

The Zacks Consensus Estimate for the company’s earnings estimates for the third quarter and 2020 have moved north by 8% and 3%, respectively, over the past 60 days. Also, earnings estimates for the next year have improved 2% in the past few days.

Growth Drivers

The company’s Label and Packaging Materials segment serves essential categories that are experiencing higher demand during coronavirus pandemic. The segment is well poised for profitable growth in the current year, driven by a solid top line, continued margin expansion, volume improvement, focus on high-value categories led by specialty labels, and contributions from productivity initiatives. Further, Avery Dennison’s completion of restructuring actions associated with the consolidation of the European footprint of the segment will drive higher returns and improve competitiveness.

The company 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 drive Retail Branding and Information Solutions (RBIS) segment. The segment’s global presence is providing it a competitive advantage amid the coronavirus pandemic. The company continues to increase investments to drive growth both organically and through acquisitions with higher spending for business development and R&D. In sync with this, Avery Dennison acquired Smartrac’s Transponder (RFID Inlay) Division. The buyout is likely to bolster its rapidly-growing Intelligent Labels platform across end markets and customers within the industrial and retail segments.  The deal will generate greater revenues with RFID business anticipated to grow 15-20% annually over the long term.

In the wake of the weak demand in some of its business owing to the COVID-19 pandemic, the company has undertaken temporary actions to reduce costs including reductions in travel and other discretionary spending, reduced usage of overtime and temporary employees, delays of merit increases, and furloughs. The company estimates incremental savings from restructuring actions, net of transition costs, of $60 million to $70 million during 2020. It anticipates carryover savings, net of transition costs, of approximately $70 million in 2021. Additionally, Avery Dennison is targeting net temporary savings of approximately $150 million in 2020, over half of which has been realized in the first half of the year.

Risks

Despite significant growth prospects, Avery Dennison is likely to bear the brunt of the coronavirus pandemic. The company’s RBIS business, which primarily serves apparel markets, is seeing a significant decline in demand, reflecting widespread retail store and apparel manufacturing closures. The graphic portion of the Label and Graphic Materials segment is also expected to bear the brunt of the pandemic this year.

Stocks to Consider

Some better-ranked stocks in the Industrial Products sector include Silgan Holdings, Inc. (SLGN - Free Report) , IIVI Incorporated (IIVI - Free Report) and SiteOne Landscape Supply, Inc. (SITE - Free Report) . While Silgan and IIVI sport a Zacks Rank #1, SiteOne carries a Zacks Rank of 2, currently. You can see the complete list of today’s Zacks #1 Rank stocks here.

Silgan has a projected earnings growth rate of 28.7% for 2020. The company’s shares have appreciated 28.4% over the past year.

IIVI has an estimated earnings growth rate of 29% for the ongoing year. The company’s shares have gained 18.1% in a year’s time.

SiteOne Landscape has an expected earnings growth rate of 15.4% for the current year. The stock has surged 61.6% over the past year.

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