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Avery Dennison (AVY) Gains From Strong Demand Amid Higher Cost

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Avery Dennison Corporation (AVY - Free Report) has been benefiting from robust demand for consumer-packaged goods and e-commerce growth. Strong growth in high-value products, intelligent labels, Radio-frequency identification (RFID) and core apparel business will aid growth. Also, anticipated benefits from cost-reduction actions, focus on investments and acquisitions will continue to benefit it. However, cost inflation and supply chain disruptions are likely to dent the company’s performance in the near term.

Rising Demand for Consumer Products Packaging

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 are tied to logistics and shipping, which will be aided by a rise in e-commerce activities.

Segments Ride on Growth in High-Value Categories

Avery Dennison’s Label and Graphic Materials segment has been gaining from healthy demand for consumer-packaged goods and e-commerce trends. 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 in the current year.

Avery Dennison’s Retail Branding and Information Solutions 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 and 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.

Cost Inflation to Dent Margin

Avery Dennison expects uncertainties related to the pandemic to persistently affect its performance until the situation stabilizes. The 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 further push raw material, labor and freight costs. These factors might dent the company’s margins in first-quarter 2022.

Price Performance

Avery Dennison’s shares have declined 15.7% in the past six months compared with the industry’s fall of 12%.

Zacks Investment Research
Image 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 Packaging Corporation of America (PKG - Free Report) , AGCO Corporation (AGCO - Free Report) and Deere & Company (DE - Free Report) . While PKG flaunts a Zacks Rank #1 (Strong Buy), AGCO and DE carry a Zacks Rank #2 (Buy), at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Packaging Corp reported adjusted EPS of $2.76 in fourth-quarter 2021, up 108% year over year and beating the Zacks Consensus Estimate of $2.08. PKG pulled off a trailing four-quarter earnings surprise of 22.7%, on average.

Packaging Corp has an expected earnings growth rate of 12.5% for 2022. The Zacks Consensus Estimate for the current year’s earnings has moved up 5% in the past 60 days. PKG’s shares have gained 14% in the past six months.

AGCO Corp's fourth-quarter 2021 adjusted EPS increased 100% year over year to $3.08, beating the Zacks Consensus Estimate of $1.72. AGCO pulled off a trailing four-quarter earnings surprise of 56.6%, on average. In the past six months, the company’s shares have gained 12.2%.

AGCO Corp has an estimated earnings growth rate of around 12.1% for 2022. In the past 60 days, the Zacks Consensus Estimate for current-year earnings has been revised upward by 10.8%.

Deere’s first-quarter fiscal 2022 adjusted EPS of $2.92 surpassed the Zacks Consensus Estimate of $2.28. DE delivered a trailing four-quarter earnings surprise of 20.6%, on average.

Deere has a projected earnings growth rate of 19.7% for the current fiscal. The Zacks Consensus Estimate for fiscal 2022 earnings has moved north by 2.3% in the past 60 days. DE has moved up 16.2% in the past six months.