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Why Hold Strategy is Apt for Avery Dennison Stock Right Now

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Avery Dennison Corporation (AVY - Free Report) remains poised for growth backed by acquisitions, strong presence in emerging markets, focus on pricing actions and restructuring activities. However, its performance will be affected by sluggish market trends and negative currency-translation impact.

The company outpaced the Zacks Consensus Estimate in all of the trailing four quarters, the average positive beat being 2.21%. It has an estimated long-term earnings growth rate of 8.30%.

The company currently carries a Zacks Rank #3 (Hold) and has a VGM Score of B. Our research shows that stocks with a VGM Score of A or B, when combined with a Zacks Rank #1 (Strong Buy) 2 (Buy) or 3, offer the best investment opportunities.

Below, we briefly discuss the company’s potential growth drivers and possible headwinds.

Factors Favoring Avery Dennison

Price Performance

Over the past six months, Avery Dennison’s shares have gained 16.1%, outperforming the industry’s growth of 13.1%.



Return on Equity (ROE)

Avery Dennison’s trailing 12-month ROE of 52.8% reinforces its growth potential. The company’s ROE is higher than the ROE of 21.6% for the industry, highlighting its efficiency in utilizing shareholders’ funds.

Upbeat Earnings Growth Projections

The Zacks Consensus Estimate for the company’s ongoing-year earnings is currently pegged at $6.55, suggesting growth of 8.09% from the year-ago reported figure. The same for 2020 stands at $7.06, indicating a year-over-year rise of 7.76%.

Growth Drivers

Avery Dennison continues to deliver solid margin expansion and double-digit adjusted earnings improvement, backed by acquisitions, organic growth and strong presence in emerging markets.
 
Avery Dennison focuses on four overarching priorities, which include driving growth in high-value product categories, enhancing profitability in base businesses, relentlessly pursuing productivity improvement and a disciplined capital-management approach.

The Label and Graphic Materials segment will maintain its stellar top-line growth momentum and continued margin expansion, aided by growth in emerging markets, focus on high-value categories led by specialty labels and contributions from productivity initiatives. Furthermore, the completion of restructuring actions associated with the consolidation of its European footprint will bring in higher returns and boost the segment’s competitiveness.

The company will benefit from its fast-growing high-value product categories, such as specialty labels and Radio-frequency identification. Avery Dennison anticipates strong engagement among apparel retailers and brands as well as promising early-stage developments in other end markets. Moreover, the company has increased its investments to fuel growth with higher spending for business development and R&D. Moreover, Avery Dennison is confident about meeting the margin-expansion target of more than 10% for the current year for the Industrial and Healthcare Materials (IHM) segment.
 
Few Headwinds to Counter

Avery Dennison lowered its near-term outlook for top-line growth due to sluggish market trends and currency headwinds. Consequently, for the current year, the company has reduced the higher end of the adjusted EPS guidance to $6.50-$6.60 from the prior view of $6.50-$6.65. Also, including the impact of the pension-settlement charge, it has tightened its EPS guidance to $3.15-$3.25 from the prior estimate of $3.15-$3.30. Additionally, for the full year, Avery Dennison has lowered its organic sales growth projection to the range of 2% to 2.3%.

Furthermore, due to strengthening of the U.S. dollar, currency translation might have a larger impact on Avery Dennison in the days ahead.

Bottom Line

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 Industrial Products sector are Northwest Pipe Company (NWPX - Free Report) , Tennant Company (TNC - Free Report) and Sharps Compliance Corp . All of these stocks sport a Zacks Rank #1 (Strong Buy), at present. You can see the complete list of today's Zacks #1 Rank stocks here.

Northwest Pipe has an expected earnings growth rate of 15.8% for the current year. The stock has appreciated 50% over the past year.

Tennant has a projected earnings growth rate of 29.8% for 2019. The company’s shares have rallied 43% over the past year.

Sharps Compliance has an estimated earnings growth rate of 500% for the ongoing year. In a year’s time, the company’s shares have gained 38%.

5 Stocks Set to Double
 
Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth. Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.
 
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