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Avery Dennison (AVY) Bets on Strong Demand, Buyouts Amid Cost Woes

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Avery Dennison Corporation (AVY - Free Report) has been benefiting from the pandemic-driven demand for essential categories and e-commerce growth. Strong growth in high-value products, anticipated benefits from cost-reduction actions, focus on investments, growing profitability in base businesses and acquisitions will continue to stoke growth. However, cost inflation and supply chain disruptions are likely to dent the company’s performance in the near term.

Escalating Packaging Demand for Essential Products

Labeling 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 a soaring need 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 labeling technology to pressure-sensitive materials will fuel the company’s growth. Apart from these, around 15% of its revenues are tied to logistics and shipping, which will be aided by a rise in e-commerce activities.

Segments Poised to Deliver Growth

Avery Dennison’s Label and Graphic Materials segment has been gaining from healthy demand for consumer-packaged goods and e-commerce trends in the Label and Packaging Materials business. The Graphics and Reflective Solutions business has been witnessing a strong rebound in demand from the decline witnessed in 2020. 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, and contributions from productivity initiatives.

Avery Dennison will benefit from its rapidly-growing high-value product categories, particularly 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. These factors are contributing to the Retail Branding and Information Solutions (RBIS) segment. The company has also been focusing on investing in digital identification technologies. In sync with this, the company acquired Vestcom to expand its foothold in high-value categories while adding channel access and data-management capabilities to RBIS, which have the potential to advance the Intelligent Labels strategy.

The Industrial and Healthcare Materials segment has been benefiting from the rebound in demand for industrial products and focus on investments. Management has undertaken temporary initiatives to reduce costs and negate the impact of weak demand in some of its businesses due to the COVID-19 pandemic.

Cost Inflation to Dent Margin

Avery Dennison has been witnessing raw material, labor and freight cost inflation, which might dent its margins in the fourth quarter and first-quarter 2022. The company has been countering the cost increases through a combination of product reengineering and pricing, and announced additional price increases in most of its businesses worldwide. The supply chain is also likely to remain tight on account of the rising cases due to the Omicron variant of coronavirus, which might impact the company’s end-market demand.

Price Performance

Avery Dennison’s shares have gained 31.6% in the past year compared with the industry’s growth of 28%.

Zacks Investment ResearchImage Source: Zacks Investment Research

Zacks Rank & Stocks to Consider

Avery Dennison currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the Industrial Products sector are Berry Global Group, Inc. (BERY - Free Report) , ScanSource, Inc. (SCSC - Free Report) and MSC Industrial Direct Co., Inc. (MSM - Free Report) . While BERY flaunts a Zacks Rank #1 (Strong Buy), SCSC and MSM carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Berry Global Group has an estimated earnings growth rate of around 2.8% for fiscal 2022. In the past 60 days, the Zacks Consensus Estimate for fiscal 2022 earnings has been revised upward by 18%.

In a year, the company’s shares have increased 30.5%. Berry Global Group has a trailing four-quarter earnings surprise of 16.5%, on average.

ScanSource has an expected earnings growth rate of 18.9% for fiscal 2022. The Zacks Consensus Estimate for fiscal 2022 earnings has been revised upward by 0.9% in the past 60 days.

ScanSource’s shares have rallied 31.4% in the past year. SCSC has a trailing four-quarter earnings surprise of 34.7%, on average.

MSC Industrial has a projected earnings growth rate of 19.9% for fiscal 2022. The Zacks Consensus Estimate for fiscal 2022 earnings has been revised upward by 2.9% in the past 60 days.

MSM’s shares have gained 5.5% in a year. MSC Industrial has a trailing four-quarter earnings surprise of 2.9%, on average.

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