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Here's Why Avery Dennison (AVY) is a Solid Pick Right Now

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Avery Dennison Corporation (AVY - Free Report) looks promising at the moment, aided by forecast-topping fourth-quarter 2020 results and heightening demand for essential categories amid the coronavirus pandemic. The company’s focus on growing its high-value categories led by specialty labels, anticipated benefits from productivity initiatives, as well as restructuring and cost-control actions, will likely drive its performance in the days to come.

The stock has gained 86.4% over the past year compared with the industry’s growth of 75.7%.

The company currently carries a Zacks Rank #2 (Buy) and has 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) or 2, offer the best investment opportunities. You can see the complete list of today’s Zacks #1 Rank stocks here.

Let's delve deeper into the factors that make the Avery Dennison stock a compelling investment option at the moment.

Earnings & Sales Top Estimates in Q4

Last month, the company reported fourth-quarter adjusted earnings of $2.27 per share, surpassing the Zacks Consensus Estimate of $2.17. The bottom line also improved 31% year over year on robust demand in the Label and Packaging Materials and industrial categories, growth in high value categories and the company’s cost-saving actions. Total revenues of $1.99 billion also beat the Zacks Consensus Estimate of $1.93 billion and increased 12% year over year.

Earnings Surprise History

The company has a trailing four-quarter average earnings surprise of 13.2%.

Upbeat Outlook

Avery Dennison projects earnings per share between $7.65 and $8.05 for the current year. The mid-point of the range reflects year-over-year growth of 11%. Given the continued recovery in end markets across the segments, management estimates organic sales growth to be approximately 3-7% for the ongoing year.

Return on Equity (ROE)

Avery Dennison’s trailing 12-month ROE of 45.8% reinforces its growth potential. The company’s ROE is higher than the industry’s ROE of 8.7%, highlighting its efficiency in utilizing shareholder funds.

Positive Growth Projections

The Zacks Consensus Estimate for 2021 earnings per share is currently pegged at $7.94, indicating growth of 11.8% from the prior year. The same for 2022 is pinned at $8.66, suggesting a year-over-year improvement of 9%.

The stock has an estimated long-term earnings growth rate of 7.9%.

Other Growth Drivers

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 term, rising 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 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. Moreover, the company closed the ACPO acquisition in fourth-quarter 2020, which fortified its position in the North American label and graphics materials business.

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. Apart from this, the company’s acquisition of Smartrac’s Transponder (RFID Inlay) Division will generate higher revenues, with the RFID business anticipated to be up 15-20% annually over the long term.

Along with its restructuring efforts, Avery Dennison has undertaken temporary cost-containment actions to negate the impact of waning demand in some of the company’s businesses due to the pandemic.

Other Stocks to Consider

Other top-ranked tocks in the Industrial Products sector include Deere & Co. (DE - Free Report) , AGCO Corporation (AGCO - Free Report) and Dover Corporation (DOV - Free Report) , each carrying a Zacks Rank #2.

Deere has a projected earnings growth rate of 82.5% for fiscal 2021. Over the past year, the company’s shares have appreciated 133.2%.

AGCO has an estimated earnings growth rate of 29.9% for the ongoing year. The company’s shares have surged 134.1% in the past year.

Dover has an expected earnings growth rate of 13.7% for 2021. The stock has gained 38.7% in a year’s time.

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