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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 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 due to the coronavirus pandemic 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 A. 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

Encouraging Outlook

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 solid volume growth and continued productivity gains. Organic sales growth is estimated to be 2-3%.

Price Performance

Avery Dennison, along with ACCO Brands Corporation (ACCO - Free Report) , falls under Office Supplies industry. The company’s shares have lost 9.7% over the past year compared with the industry’s decline of 21.9%.



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 industry’s ROE of 21.5%, highlighting its efficiency in utilizing shareholder funds.

Upbeat Earnings Growth Projections

The Zacks Consensus Estimate for the company’s ongoing-year earnings per share is currently pegged at $6.92, suggesting 4.8% year-on-year growth.

Growth Drivers

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 ongoing 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 the RFID business anticipated to be up 15-20% annually over the long term. Through the acquisition the company will bolster its rapidly-growing Intelligent Labels platform across end markets and customers within the industrial and retail segments.

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.

Risks

Despite significant growth prospects, Avery Dennison will bear the brunt of sluggish market trends due to the coronavirus pandemic impacting the company’s operations in China. Along with that, currency fluctuations also remains a headwind. These are likely to affect the company’s near-term results.

Stocks to Consider

Some better-ranked stocks in the Industrial Products sector include Sharps Compliance Corp (SMED - Free Report) and Tetra Tech, Inc. (TTEK - Free Report) . While Sharps Compliance Corp sports a Zacks Rank #1, Tetra Tech carries a Zacks Rank of 2. You can see the complete list of today's Zacks #1 Rank stocks here.

Sharps Compliance has an estimated earnings growth rate of 767% for 2020. In a year’s time, the company’s shares have gained 36%.

Tetra Tech has an expected earnings growth rate of 10.7% for the ongoing year. In the past year, the company’s shares have appreciated 38%.

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