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Reasons to Retain Avery Dennison (AVY) Stock in Your Portfolio

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Avery Dennison Corporation (AVY - Free Report) is benefiting from robust demand for consumer-packaged goods and e-commerce trends. Strong growth in high-value products, intelligent labels, Radio-frequency identification (RFID) and core apparel business will aid growth. Apart from this, expected benefits from cost-reduction actions and focus on investments and acquisitions bode well.

Positive Earnings Surprise History: Avery Dennison, a Zacks Rank #3 (Hold) company, has a trailing four-quarter earnings surprise of 7.64%, on average.

Positive Growth Expectations: The company’s earnings estimate for the current year is pegged at $9.63, suggesting year-over-year growth of 8.08%.

Upbeat View: In the fourth-quarter earnings call, Avery Dennison provided its adjusted earnings per share (EPS) guidance for 2022 in the band of $9.35-$9.75. The company reported an adjusted EPS of $8.91 in 2021. It expects organic sales growth of 8-11%, driven by higher volume and the impact of higher prices.

Return on Equity: Avery Dennison’s trailing 12-month ROE supports its growth potential. The company’s ROE of 42.6% compares favorably with the industry’s average ROE of 11.1%, reflecting that it efficiently utilizes shareholders’ funds.

Price Performance: Avery Dennison’s shares have lost 11.8% in the past year compared with the industry’s loss of 9.1%.

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Growth Drivers

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

Strong demand for consumer-packaged goods and e-commerce trends continues to drive the Label and Graphic Materials segment. 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 and contributions from productivity initiatives.

Avery Dennison’s Retail Branding and Information Solutions RBIS segment is gaining from solid margin expansions, driven by strength in high-value categories and the base business. The segment is witnessing strong growth in Intelligent Labels, RFID and the core apparel label business, with particular strength and performance in premium channels as well as continued double-digit growth in external embellishments. Its Intelligent Labels business continues to expect long-term annual growth of 15-20%. In addition, the company is focused on investing in digital identification technologies. In sync with this, the company acquired Vestcom to expand the company’s foothold in high-value categories, while adding channel access and data-management capabilities to intelligent labels. The company has undertaken several pricing and re-engineering actions to mitigate inflationary cost pressures.

However, Avery Dennison expects uncertainties related to the pandemic to persistently impact its performance until the situation stabilizes. Supply chain is likely to remain tight due to a spike in coronavirus cases in many countries. Strong demand and supply constraints are likely to push further raw material, labor and freight costs. These factors might dent the company’s margins in first-quarter 2022.

Stocks to Consider

Some better-ranked stocks in the Industrial Products sector include Applied Industrial Technologies, Inc. (AIT - Free Report) , Dover Corporation (DOV - Free Report) and Silgan Holdings Inc. (SLGN - Free Report) . While AIT sports a Zacks Rank #1 (Strong Buy), DOV and SLGN carry a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Applied Industrial Technologies reported adjusted EPS of $1.46 in second-quarter fiscal 2022 (ended Dec 31, 2020), up 49% year on year and beating the Zacks Consensus Estimate of $1.09. AIT has a trailing four-quarter earnings surprise of 27.9%, on average.

Applied Industrial Technologies has an expected earnings growth rate of 24.8% for fiscal 2022. The Zacks Consensus Estimate for fiscal year earnings has moved up 9.4% in the past 60 days. AIT’s shares have appreciated 9% in a year.

Dover’s fourth-quarter 2021 adjusted EPS increased 15% year over year to $1.78, beating the Zacks Consensus Estimate of $1.66. DOV has a trailing four-quarter earnings surprise of 12.3%, on average.

Dover has an estimated earnings growth rate of around 12.7% for 2022. In the past 60 days, the Zacks Consensus Estimate for current-year earnings has been revised upward by 5%. DOV’s shares have rallied around 13.5% in a year.

Silgan Holdings’ fourth-quarter 2021 adjusted EPS increased 32% year over year to a record 79 cents, beating the Zacks Consensus Estimate of 73 cents. SLGN has a trailing four-quarter earnings surprise of 3.8%, on average.

Silgan has a projected earnings growth rate of 13.5% for the current year. The Zacks Consensus Estimate for 2022 earnings has moved north by 3% in the past 60 days. In a year’s time, SLGN has gained 1%.