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Avery Dennison Gains on High-Value Products, Cost Actions

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On Oct 1, we issued an updated research report on Avery Dennison Corporation (AVY - Free Report) . The company is well poised to grow on the rising demand for essential categories in the Label and Packaging Materials segment amid the pandemic. Growth in high-value categories led by specialty labels, and contributions from productivity initiatives will also aid the company’s performance. Further, restructuring and cost-containment actions will contribute to growth.

Segment Poised to Grow

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

High-Value Products to Spur Growth

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 bolster the Retail Branding and Information Solutions (RBIS) segment. The segment’s global presence is providing it a competitive advantage amid the pandemic.

The company continues to increase investments in a bid to fuel growth both organically and through acquisitions with higher spending for business development and R&D. In sync with this, Avery Dennison has 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 stellar revenues, with the RFID business anticipated to grow 15-20% annually over the long term.

Cost-Containment Efforts to Stoke Growth

In the wake of the weak demand in some of its business due to the COVID-19 pandemic, the company has undertaken temporary actions to reduce costs. It estimates incremental savings from restructuring actions, net of transition costs, of $60-$70 million for 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, more than half of which has been realized in the first half of the year. Some of the prominent industry peers like Sonoco Products Company (SON - Free Report) , Crown Holdings, Inc. (CCK - Free Report) and Silgan Holdings Inc. (SLGN - Free Report) are also taking cost control actions amid the challenging environment.

Few Headwinds to Counter

Avery Dennison’s top and bottom lines are likely to decline in the current year on weaker demand due to the pandemic. The company’s RBIS business, which primarily serves the 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.

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