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Avery Dennison (AVY) Up 1.4% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Avery Dennison (AVY - Free Report) . Shares have added about 1.4% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Avery Dennison due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Avery Dennison Q4 Earnings & Revenues Beat Estimates

Avery Dennison reported fourth-quarter 2020 adjusted earnings of $2.27 per share, surpassing the Zacks Consensus Estimate of $2.17 by a margin of 5%. The bottom line also improved 31% year over year driven by enhanced demand in Label and Packaging Materials and industrial categories, growth in high value categories and its cost saving actions.

Including one-time items, the company reported earnings per share of $2.28 compared with $1.92 in the year-ago quarter.

Total revenues increased 12% year over year to $1.99 billion and beat the Zacks Consensus Estimate of $1.93 billion. Sales were up 3.2% on an organic basis.

Cost of sales in the quarter increased 10% year over year to $1,420 million. Gross profit climbed 18% year over year to $571 million. Gross margin expanded 135 basis points year over year to 28.7% in the fourth quarter.

Marketing, general and administrative expenses were around $302 million compared with $273 million incurred in the year-ago quarter. Adjusted operating profit amounted to around $269 million, up 27% from the $212 million in the prior-year quarter. Adjusted operating margin was 13.5% in the quarter, up 160 basis points from the prior-year quarter.

Segment Highlights

Revenues in the Label and Graphic Materials (LGM) segment increased 10% year over year to $1,295 million in the reported quarter. On an organic basis, sales were up 3.6%. Adjusted operating profit increased 28% year on year to $200 million.

Revenues in the Retail Branding and Information Solutions (RBIS) segment advanced 19% year over year to $508 million. On an organic basis, sales were up 3.1% as strong organic growth in high value categories were offset by a low-to-mid-single digit decline in the base business, due to overall lower apparel demand. The segment’s adjusted operating income surged 37% year over year to $80 million.

Net sales in the Industrial and Healthcare Materials (IHM) segment totaled $188 million, up 11% from $170 million in the prior-year quarter. On an organic basis, sales increased 0.7% as a high-single digit increase in industrial categories was offset by a mid-single digit decline in healthcare categories. The segment reported adjusted operating income of $23 million compared with the prior-year quarter’s $17 million.

Financial Updates

Free cash flow in 2020 was $547.5 million, up from $512.3 million in the prior year. Total capital spending for the year was $219 million. Through 2020, the company returned $301 million in cash to shareholders through a combination of share repurchases and dividends. It also closed two strategic acquisitions during the year, ACPO and Smartrac. Avery Dennison ended 2020 with cash and cash equivalents of $252 million compared with $254 million at the end of 2019. As of the end of fourth-quarter 2020, Avery Dennison’s net debt to adjusted EBITDA ratio was 1.7, below the company’s long-term target of 2.3-2.6.

Cost-Reduction Activities

In the wake of weak demand decline in some businesses, the company has undertaken temporary actions to reduce costs, which is also in sync with its focus on long-term strategic restructuring. This includes curtailment in travel and other discretionary spending, reduced usage of overtime and temporary employees, delays of merit increases, and furloughs.

Avery Dennison realized $18 million in pre-tax savings from restructuring in the fourth quarter, bringing the total for the year to $65 million. On top of this, the company realized net temporary savings of approximately $135 million in 2020.

2020 Results

Avery Dennison’s adjusted earnings per share improved 8% year over year to $7.10 in 2020. Earnings beat the Zacks Consensus Estimate of $6.94. Including one-time items, the bottom line was $6.61, up 85% from the $3.57 in 2019.

Sales declined 1.4% year over year to $6.97 billion from the prior year’s $7.07 billion. The top-line figure beat the Zacks Consensus Estimate of $6.88 billion.

Guidance

For 2021, Avery Dennison expects earnings per share between $7.65 and $8.05. The mid-point of the guidance range reflects year-over-year growth of 11%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

Currently, Avery Dennison has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. It comes with little surprise Avery Dennison has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.


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