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Why Hold Strategy is Apt for Avery Dennison (AVY) Stock Right Now

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Avery Dennison Corporation (AVY - Free Report) is benefiting from the pandemic-driven demand for essential categories and e-commerce growth. Additionally, strong growth in high-value products, anticipated benefits from cost-reduction actions as well as focus on investments and acquisitions will stoke growth.

Avery Dennison currently carries a Zacks Rank #3 (Hold) 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), 2 (Buy) or 3, offer the best investment opportunities. You can see the complete list of today’s Zacks #1 Rank stocks here.

Price Performance: Avery Dennison’s shares have gained 37.3% so far this year, outperforming the industry’s growth of 26.5%.

Zacks Investment ResearchImage Source: Zacks Investment Research

Positive Growth Expectations: The company’s earnings estimate for the current year is pegged at $8.94, suggesting year-over-year growth of 25.9%.

Positive Earnings Surprise History: Avery Dennison has a trailing four-quarter average earnings surprise of 14.2%.

Superior Return on Assets: Avery Dennison currently has a Return on Assets (“ROA”) of 12.1%, higher than the industry’s 3.9%. An above-average ROA denotes that the company is generating earnings by effectively managing its assets.

Return on Equity: Avery Dennison’s trailing 12-month ROE supports its growth potential. The company’s ROE of 48.5% compares favorably with the industry’s average ROE of 11.3%, reflecting that it is more efficient in utilizing shareholders’ funds.

Growth Drivers

Labelling of non-durable consumer goods, like food, beverage, home and personal care products, accounts for around 40% of Avery Dennison’s revenues. The company has been witnessing soaring demand for these products amid the pandemic. Over the long run, increasing demand from emerging markets on the back of the rising middle class, and the consequent surge in demand for packaged goods and a shift in the labelling technology to pressure-sensitive materials will fuel the company’s growth. Apart from these, around 15% of its revenues is tied to logistics and shipping, which will be aided by the rise in e-commerce activities.

The company’s Label and Graphic Materials segment is gaining from healthy demand for consumer-packaged goods and e-commerce trends in its Label and Packaging Materials business. In the current year, the segment is well poised to benefit from solid top-line growth and margin expansion, volume improvement, focus on high-value categories led by specialty labels, contributions from productivity initiatives, as well as the pandemic-driven demand for essential products.

Avery Dennison will benefit from its rapidly-growing high-value product categories, such as Intelligent Labels, Radio-frequency identification (RFID) and core apparel label business, as retailers and brands gear up for a solid rebound in the end-market demand, aided by double-digit growth in external embellishments. These factors are aiding the Retail Branding and Information Solutions segment. In addition, the company is focused on investing in digital identification technologies. Last month, Avery Dennison acquired Vestcom for $1.45 billion to expand the company’s foothold in high value categories, while adding channel access and data-management capabilities to RBIS that have the potential to further advance Intelligent Labels strategy.

The Industrial and Healthcare Materials segment is gaining from the rebound in demand for industrial products and focus on investments. Given these factors, Avery Dennison projects earnings per share between $8.65 and $8.95 in 2021.

The management has also undertaken temporary cost-containment actions to negate the impact of waning demand in some of the company’s businesses due to the pandemic. It anticipates incremental savings from restructuring actions, net of transition costs of roughly $60-$65 million in the ongoing year.

Avery Dennison is witnessing raw material, labor and freight cost inflation, which might dent its margins in the third quarter. Therefore, the company is implementing product re-engineering and pricing, and has announced additional price increases in most of its businesses across the world.

Stocks to Consider

Better-ranked stocks in the Industrial Products sector include Alcoa Corporation (AA - Free Report) , The Manitowoc Company, Inc. (MTW - Free Report) and Deere & Company (DE - Free Report) , each sporting a Zacks Rank #1, at present.

Alcoa has an estimated earnings growth rate of 573.2% for 2021. The company’s shares have rallied 121.2% so far this year.

Manitowoc has an expected earnings growth rate of 340% for 2021. The stock has appreciated 69.2% year to date.

Deere has a projected earnings growth rate of 117.5% for fiscal 2021. So far this year, the company’s shares have gained 32.2%.