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Avery Dennison (AVY) Grows on Acquisitions as Costs Flare Up

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On Jan 10, we issued an updated research report on Avery Dennison Corporation (AVY - Free Report) . The company is poised to gain from its focus on productivity and acquisitions. However, escalating costs are expected to affect results.

Acquisitions Drive Avery Dennison’s Growth

Avery Dennison continues to increase the pace of investment in order to leverage its specialty labels, graphics and reflective solutions business. The acquisitions of Mactac Europe, Hanita Coatings and Ink Mill, as well as the company’s investment to expand the plant in Luxembourg reflect its efforts to grow in the space.

In second-quarter 2017, the company acquired Yongle Tape Company Ltd. — a manufacturer of specialty tapes and related products used in a variety of industrial market. Avery Dennison has also acquired Finesse Medical, a maker of materials used for wound care and skin treatments. Finesse Medical is a strategic fit with Avery Dennison’s Vancive Medical Technologies.

Focus on Productivity to Fuel Sales

Avery Dennison has been focusing on efforts to drive productivity and increasing its investments to support growth. Its Label and Graphic Materials segment will benefit from growth in emerging markets, including high single-digit growth in India and China.

Further, the company’s Retail Branding and Information Solutions segment continues to perform well, backed by the business model transformation that has enabled it to gain market share, while driving significant margin expansion. Avery Dennison also boosted this segment’s competitiveness through strategic pricing initiatives.

Escalating Costs to Impede Near-Term Profit

Avery Dennison expects that one-time transition costs related to the acquisition of Yongle will impact margins in the Industrial and Healthcare Materials segment in the fourth quarter. In addition, the company might witness higher interest expense due to elevated debt levels following the Yongle and Finesse acquisitions.

Share Price Performance

Avery Dennison has outperformed its industry with respect to price performance in a year’s time. The stock has appreciated around 64.4%, while the industry has recorded growth of 51.5% during the same time frame.

Zacks Rank & Stocks to Consider

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

Some better-ranked stocks in the same industry are Deere & Company (DE - Free Report) , Caterpillar Inc. (CAT - Free Report) and Kennametal Inc. (KMT - Free Report) . While Deere sports a Zacks Rank #1 (Strong Buy), Caterpillar and Kennametal carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Deere has a long-term earnings growth rate of 8.2%. Its shares have rallied 33.6%, over the past six months.

Caterpillar has a long-term earnings growth rate of 10.3%. The company’s shares have been up 53.3% during the same time frame.

Kennametal has a long-term earnings growth rate of 8.3%. The stock has gained 30.5% in six months’ time.

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