On Aug 25, we issued an updated research report on Avery Dennison Corporation (AVY - Free Report) . The company is poised to gain from its focus on pricing actions, restructuring in the Label and Graphic Materials (LGM) segment and acquisitions. However, additional charges, negative impact of currency translation and raw material price inflation will impact the company’s performance.
Let’s take a look into these factors in detail.
Pricing Actions to Boost Revenues
Avery Dennison estimates that organic sales growth for 2018 will be 5-5.5%, reflecting higher contribution from pricing actions. The company announced new price increases during second-quarter 2018 in North America, Europe, South Asia and Latin America, and expects to fully recover the cumulative gap between cost and price. Further, Avery Dennison’s aggressive cost cutting and restructuring, as part of the current optimization program, will likely lead to higher savings and earnings.
Restructuring Actions in LGM Segment to Fuel Growth
Avery Dennison’s restructuring actions associated with the consolidation of the European footprint of the segment will drive returns and improve competitiveness. The plan, which is anticipated to close by 2019, includes net reduction in headcount of around 150 positions, shutdown or movement of several coating assets, as well as the closure of a plant in Schwelm, Germany. The company anticipates to realize roughly $25 million in annualized savings from this plan, beginning 2020.
Avery Dennison to Grow on Acquisitions
Avery Dennison will continue to increase the pace of investment to leverage specialty labels, graphics and reflective solutions business, as demonstrated by the acquisitions of Mactac Europe, Hanita Coatings and Ink Mill. In 2017, the company acquired Yongle Tape Company Ltd., a manufacturer of specialty tapes and related products used in a variety of industrial markets.
In the same year, Avery Dennison 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. All these acquisitions are in line with the company’s strategy to accelerate its portfolio shift to higher-value categories.
Additional Charges to Hurt Earnings
Avery Dennison has begun the termination process of the Avery Dennison Pension Plan, a tax-qualified U.S. defined benefit plan. After-tax impact of actions associated with the termination will impact reported earnings by 50 to 70 cents per share in 2018, reflecting estimated total pre-tax settlement charges of $575-$600 million.
Currency Volatility Remains a Concern
Avery Dennison stated that currency translation represents a pre-tax operating income tailwind of roughly $18 million for 2018, down from the roughly $35 million tailwind anticipated before. Due to the strengthening of the dollar in the back half of the June-end quarter, currency translation is expected to have a larger impact on Avery Dennison’s results in the second half of this year.
Inflation Remains a Woe
Excluding a net benefit from currency-related changes, the net impact of pricing and raw material costs was a headwind for Avery Dennison in the second quarter. The company now anticipates mid-single-digit inflation for 2018 compared to low single-digit estimate provided at the beginning of the year.
Share Price Performance
Avery Dennison's shares have outperformed the industry with respect to price performance over the past year. The company's shares have gained around 11% compared to the industry’s growth of 10%.
Zacks Rank & Stocks to Consider
Avery Dennison currently carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the sector include Atkore International Group Inc. (ATKR - Free Report) , Caterpillar Inc. (CAT - Free Report) and Lawson Products, Inc. (LAWS - Free Report) . All three stocks sport Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Atkore has an expected long-term growth rate of 10%. Its shares have gained 32% over the past year.
Caterpillar has an expected long-term growth rate of 15.6%. Its shares have been up 24% in a year’s time.
Lawson Products has an expected long-term growth rate of 17.5%. Its shares have rallied 31% over the past year.
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