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Avery Dennison (AVY) Up 7.2% 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 7.2% 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 its most recent earnings report in order to get a better handle on the important catalysts.

Avery Dennison reported second-quarter 2021 adjusted earnings of $2.25 per share, surpassing the Zacks Consensus Estimate of $2.07. The bottom line surged 77% on a year-over-year basis.

Including one-time items, the company reported earnings per share of $2.19 compared with the year-ago quarter’s 95 cents per share.

Total revenues increased 37.5% year over year to $2.10 billion as well as beat the Zacks Consensus Estimate of $1.96 billion. Sales were up 28.1%, year over year, on an organic basis.

Cost of sales in the quarter grew 33.2% year over year to $1,526 million. Gross profit climbed 51%, year over year, to $576 million. Gross margin expanded to 27.4% in the second quarter compared with the prior-year quarter’s 25%.

Marketing, general and administrative expenses were $307 million compared with the $219 million incurred in the year-ago period. Adjusted operating profit amounted to around $269 million, up 65% from the prior-year quarter’s $164 million. Adjusted operating margin was 12.8% in the quarter compared with the prior-year quarter’s 10.7%.

Segment Highlights

Revenues in the LGM segment increased 25% year over year to $1,376 million in the reported quarter. Label and Packaging Materials sales were up 12%, with stellar growth witnessed in both the high value product categories and the base business.

Sales jumped 49% in the combined Graphics and Reflective Solutions businesses. On an organic basis, sales were up 16%. The segment’s adjusted operating profit increased 22% year on year to $199.6 million.

Revenues in the RBIS segment climbed 79.5% year over year to $529 million. On an organic basis, sales were up 72%, reflecting solid growth in both the high value categories and the base business. The segment’s adjusted operating income was $69.6 million compared with the year-ago quarter’s $2.2 million.

Net sales in the IHM segment totaled $196.5 million, up 49% from the $132.1 million recorded in the prior-year quarter. This highlights a 60% increase in industrial categories and a high-single digit decline in healthcare categories. The segment reported adjusted operating income of $23 million compared with the prior-year quarter’s $9 million.

Financial Updates

Free cash flow in the reported quarter was $206 million compared with the prior-year quarter’s $144 million. The company returned $203 million in cash to shareholders through share repurchases and dividend payment during the first half of the current year.

Avery Dennison ended the second quarter with cash and cash equivalents of $345 million compared with $263 million at the end of the prior-year quarter. As of the end of second-quarter 2021, the company’s net debt to adjusted EBITDA ratio was 1.3, well below the company’s long-term target of 2.3-2.6.

Guidance

Backed by an impressive performance in the second quarter, Avery Dennison raised its adjusted earnings per share guidance for 2021 to the band of $8.65-$8.95 from the previous estimate of $8.40-$8.80.

Business Update

Recently, Avery Dennison entered into an agreement to acquire Vestcom for $1.45 billion in a bid to expand RBIS capabilities. Vestcom is a provider of retail shelf-edge pricing, productivity and branding labeling solutions for retailers and consumer packaged goods companies. This buyout will expand the company’s foothold in high value categories. The deal is expected to close in the third quarter.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review.

VGM Scores

At this time, Avery Dennison has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the top 40% 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 broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Avery Dennison has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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