Avery Dennison Corporation (AVY - Free Report) remains well poised for growth on acquisitions, strong presence in emerging markets and upbeat momentum across all segments. Growth in high-value product categories, focus on productivity improvement and a disciplined capital-management approach will also stoke growth. However, its performance will be affected by sluggish market trends and negative currency-translation impact.
The stock has an estimated long-term earnings growth rate of 8%, higher than the industry’s 7.5%.
The company currently carries a Zacks Rank #3 (Hold) and 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.
Factors Favoring Avery Dennison
Earnings Beat Q4 Estimates
Avery Dennison’s adjusted earnings of $1.73 per share in fourth-quarter 2019 surpassed the Zacks Consensus Estimate of $1.68, increasing year on year.
For the current year, Avery Dennison expects adjusted EPS of $6.90-$7.15, up from the prior-year range of $6.45 to $6.70, reflecting improved volume growth and continued productivity gains. Organic sales growth is estimated to be 2-3%.
Over the past year, Avery Dennison’s shares have gained 31.8%, outperforming the industry’s growth of 27.8%.
Earnings Surprise History
The company outpaced the Zacks Consensus Estimate in the trailing four quarters, the average positive beat being 2.62%.
Return on Equity (ROE)
Avery Dennison’s trailing 12-month ROE of 52% 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 per share is currently pegged at $7.04, suggesting 6.7% year-on-year growth.
Avery Dennison continues to register stellar profit, margin expansion and double-digit adjusted earnings improvement, aided by acquisitions, organic growth and strong presence in emerging markets. The company is focused on four overarching priorities, comprising fueling 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 upbeat top-line momentum and margin expansion in the current year, aided by growth in emerging markets, volume improvement, 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 provide a competitive edge to the segment.
The company will benefit from its fast-growing high-value product categories, such as specialty labels and Radio-frequency identification (RFID). Continued strength in RFID and external embellishments will bolster Retail Branding and Information Solutions segment sales.
Moreover, the company has increased investments to fuel growth with higher spending for business development and R&D. In sync with this, the company acquired Smartrac’s Transponder (RFID Inlay) Division. The deal will generate more than $450 million in revenues, with RFID business anticipated to grow 15-20% annually over the long term.
The Industrial and Healthcare Materials (IHM) segment will benefit from margin expansion target as well as the Yongle, Finesse and Mactac acquisitions. Avery Dennison’s balance sheet remains strong and has ample capacity to continue funding acquisitions, executing disciplined capital-allocation strategy, investing in organic growth and returning cash to shareholders.
Despite significant growth prospects, Avery Dennison is plagued by sluggish market trends and currency headwinds. These are likely to unfavorably impact the company’s near-term results.
Stocks to Consider
Some better-ranked stocks in the Industrial Products sector are SPX FLOW, Inc. (FLOW - Free Report) , Tennant Company (TNC - Free Report) and Cintas Corp. (CTAS - Free Report) , each currently carry a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
SPX FLOW has a projected earnings growth rate of 9.1% for 2020. The company’s shares have rallied 37.6% in the past year.
Tennant has an estimated earnings growth rate of 30.7% for the ongoing year. In a year’s time, the stock has appreciated 28.7%.
Cintas has an expected earnings growth rate of 15.6% for the current year. The stock has surged 49.3% over the past year.
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