Avery Dennison Corporation (AVY - Free Report) remains poised for growth backed by focus on pricing actions, restructuring activities, and positive outlook for its Industrial and Healthcare Materials ("IHM") segment. However, its earnings will be affected by charges regarding the termination of the company’s pension plan and negative impact of currency translation.
The company has a market capitalization of approximately $8 billion and currently carries a Zacks Rank #3 (Hold).
Below, we briefly discuss the company’s potential growth drivers and possible headwinds.
Factors Favoring Avery Dennison
Return on Assets (ROA)
Avery Dennison currently has a ROA of 10%, while the industry's ROA is 8%. An above-average ROA denotes that the company is generating earnings by effectively managing assets.
Growth Drivers in Place
Avery Dennison witnessed greater-than-anticipated margin decline in the Label and Graphic Materials segment during the Sep-end quarter. Raw material inflation was higher than expected at the beginning of the season. The company announced pricing actions to combat inflation. Thus, it anticipates margin recovery in fourth-quarter 2018 on a seasonally adjusted basis.
Further, Avery Dennison’s restructuring actions associated with the consolidation of the European footprint of its Label and Graphic Materials segment will drive higher returns for the segment. The plan, which is anticipated to close by 2019, includes net reduction in headcount of approximately 150 positions, shutdown or movement of several coating assets, as well as the closure of a plant in Schwelm, Germany. The company anticipates realizing approximately $25 million in annualized savings from this plan beginning 2020.
Moreover, Avery Dennison remains confident for its target of 4-5% organic growth for the IHM segment, over the long term, and expects to see margin gradually expand by 2021. The segment will benefit from the Yongle, Finesse and Mactac acquisitions. Thus, the company is confident about meeting growth and margin targets for this business, moving ahead.
Share Price Performance
Over the past year, Avery Dennison has outperformed its industry with respect to price performance. The stock has lost 17%, while the industry has recorded a decline of around 18%.
Avery Dennison has begun the termination process of the Avery Dennison Pension Plan — a tax-qualified U.S. defined benefit plan. The company contributed $200 million to the plan during third-quarter 2018 using commercial paper borrowings. It expects to contribute an additional estimated $30 million during 2019, to fully fund the plan and complete the transaction. After-tax impact of actions associated with the termination will impact reported earnings per share by 50-70 cents in 2018, and an additional $4.25-$4.45 during 2019, reflecting estimated total pre-tax settlement charges of $575-$600 million.
Further, currency translation represents a pretax operating income tailwind of roughly $12 million for 2018, down from the roughly $18-million tailwind anticipated in July 2018. Due to the strengthening of the U.S. dollar, currency translation is expected to have a larger impact on Avery Dennison’s results in the current quarter.
Investors might want to hold on to the stock, at present, as it has ample prospects of outperforming peers in the near future.
Stocks to Consider
Some better-ranked stocks in the same sector are Enersys (ENS - Free Report) , CECO Environmental Corp. (CECE - Free Report) and Rexnord Corporation (RXN - Free Report) . While Enersys flaunts a Zacks Rank #1 (Strong Buy), CECO and Rexnord carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Enersys has a long-term earnings growth rate of 10%. Its shares have rallied 23%, over the past year.
CECO has a long-term earnings growth rate of 15%. The company’s shares have surged 51%, in the past year.
Rexnord has a long-term earnings growth rate of 16.4%. The stock has gained 14% in a year’s time.
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