Balanced Risk-Reward for Avery - Analyst Blog

On Apr 11, 2014, we issued an updated research report on Avery Dennison Corporation AVY, a pressure-sensitive materials producer and provider of a wide variety of information and brand management solutions.
 
Avery's adjusted earnings per share improved 44% year over year to 69 cents in the fourth quarter of 2013. For full-year 2013, Avery reported adjusted earnings per share of $2.68, a 37% improvement over $1.96 in 2012. The company expects its full-year 2014 adjusted earnings in the range of $2.90 to $3.20 per share.

Avery remains committed to its long-term targets (to be achieved by 2015) of sales growth in the range of 3–5% and net income growth of 10-15%. A 15–20% increase in earnings per share is expected to be achieved through continued growth in emerging markets and productivity improvements.

In Jul 2013, Avery divested its underperforming Office and Consumer Products segment along with its Designed and Engineered Solutions businesses. Net sale proceeds of approximately $390 million were utilized for share repurchases, supplemental pension plan contributions and debt reduction by $200 million. This has in turn reduced the interest burden and will thus boost margins. With the divestiture of the weaker Office Products business, the company will be able to focus on organic growth and manufacturing efficiencies in its market-leading, Pressure-Sensitive materials business, and Retail Branding and Information Solutions segment.
 
In addition, the Pressure-Sensitive Materials segment sales will rise in 2014 due to higher volumes and higher prices. Growth will be driven by the emerging markets – China, India, South America, particularly in film labels for consumer products and food & beverages, followed by a modest increase in North America as well in the European regions.

The Retail Branding and Information Solutions segment continues to benefit from increased demand from European retailers & brands. 20 of the top 30 retailers in the U.S. are now testing or already using RFID (radio-frequency identification). Several new installations are taking place in Europe as well. RFID recorded 25% growth during the year and should continue to progress in the next few years.

Avery's medical products business, Vancive Medical Solutions' major achievements during the year include the commercialization of new antimicrobial dressings that are more effective in preventing wound infection in hospitals and also more cost effective than existing products. This, and other key developments with wearable sensors position the business for double-digit growth and improved returns in 2014.

On the flipside, the Graphics business within Pressure-Sensitive Materials underperformed particularly in Europe. Sales declined and the company missed its profit target due to a negative shift in product mix. The negative product mix also affected results in the Label and Packaging Materials business. Product mix challenges will remain until the company's initiative to improve the same materializes. In addition, inflationary pressure for certain raw materials will continue to be a headwind.

Avery recently announced its plans to close an old manufacturing plant in the Netherlands and consolidate operations and invest in new production capabilities elsewhere to improve the competitiveness of the European Graphics business. Even though this restructuring plan will lead to savings in 2015, it will be a modest headwind to earnings in 2014.

Other Stocks to Consider

Avery currently retains a Zacks Rank #3 (Hold). Some other stocks worth considering in the sector include Alamo Group, Inc. ALG, Altra Industrial Motion Corp. AIMC and Zebra Technologies Corp. ZBRA, all carrying a Zacks Rank #2 (Buy).