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Avery Dennison (AVY) Strategic Deals Impress: Time to Buy?

JBT AVY ENS ACCO

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On Nov 17, we issued an updated research report on Avery Dennison Corporation (AVY - Free Report) , a producer of pressure-sensitive materials (PSM) and a variety of tickets, tags, labels and other converted products.

In the third quarter of 2016, Avery Dennison reported a 16% year-over-year increase in earnings while revenues edged up 2.8%. Both of Avery Dennison’s core businesses recorded sales growth and margin expansion. For 2016, Avery Dennison raised its adjusted earnings per share guidance to $3.95–$4.00 from the previous range of $3.80–$3.95. This reflects better-than-expected third-quarter operating results, including the lower-expected tax. Avery projects more than $75 million from restructuring savings, net of transition costs for the year. Constant focus on productivity and capital discipline is likely to help in delivering strong returns for its shareholders. Moreover, consistent execution of strategies will facilitate long-term goals for superior value creation.

Avery Dennison’s results reflect persistent outperformance of PSMs. Its goal in PSM has been to create value by organically growing revenues from this high-return business by 4% to 5%, while expanding operating margin. The company remains focused in shifting PSM's portfolio mix toward high-value graphic and specialty labels materials. The company expects to benefit over the long term from continuous investment in these areas.

The Retail Branding and Information Solutions (RBIS) unit continues to execute business model transformation, which is likely to enable this business to win in the less differentiated value and contemporary segments, while driving considerable margin expansion. Aggressive restructuring activities and other productivity actions will aid Avery Dennison achieve its long-term financial goals. Further, the company is reducing fixed costs, localizing material sourcing and responding more quickly to changes in customer needs by decentralizing decision making. These initiatives will support the company’s growth.

Avery Dennison remains focused on making investments to support growth through acquisitions. The company signed a definitive agreement to acquire Mactac Europe. The acquisition remains in line with the company’s strategic priority to further penetrate high-value segments and PSMs for graphics applications. The buyout is anticipated to have an immaterial impact on EPS in 2016 and be approximately 10 cents accretive to EPS in 2017. Further, Avery completed a very small acquisition of Ink Mill during the quarter, which expands its capabilities in the high-value Reflectives business. In Oct 2016, the company also made an equity investment in a UK-based startup, PragmatIC, leveraging its strengths in Radio-frequency identification (RFID) to enable long-term growth of intelligent labels in new segments. The deals are in sync with the company’s strategic priority to further penetrate high-value product lines and supporting technologies that will aid deliver consistent organic growth, strong profitability and returns.

During the first nine months of the year, Avery Dennison repurchased approximately 2.7 million shares for $182 million and paid $106 million in dividends. Net of dilution, the company reduced share count by 1 million. The cost of repurchases, net of proceeds from stock option exercises, was $118 million. Its strong balance sheet is likely to enable the company to fund acquisitions as well as to continue returning cash to shareholders in a disciplined manner.

Buoyed by bright prospects, the Zacks Consensus Estimate moved higher as analysts raised their estimates. Analysts polled by Zacks are convinced that this Zacks Rank #2 (Buy) stock will see an upbeat performance in the future. Avery Dennison’s estimates for the current year has moved north 1% to $3.96 over the past 30 days.

Some similarly ranked stocks in the same sector are ACCO Brands Corporation (ACCO - Free Report) , EnerSys (ENS - Free Report) and John Bean Technologies Corporation (JBT - Free Report) . ACCO Brands Corporation witnessed a 4% increase in earnings estimates in the last 30 days. The company sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

EnerSys also sports a Zacks Rank #1 and its earnings estimates have also gone up 4% in the last 30 days. John Bean Technologies, another Zacks Rank #1, stock has seen earnings estimates move north 2%.

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