JP Morgan Cuts Avery Dennison To Neutral

JPMorgan has downgraded Avery Dennison Corp

to Neutral from Overweight on "softening retail business trends" and recent share price gains. Shares of Glendale, California-based Avery Dennison, which makes pressure-sensitive products, have increased about 18 percent this year. "We think that Avery Dennison offers reasonable longer-term value because of its good free cash flow generation capabilities. But in the light of some softening retail business trends and Avery's recent share price appreciation, we think that a "wait and see" approach to the shares is warranted," analyst Jeffrey Zekauskas wrote in a note. The analyst noted that the softness in the U.S. department store sales for the first four months of 2016 may hurt the company's Retail Branding & Information segment either in the second quarter or later in the year. According to the note from the analyst, volume growth in Avery's Retail Branding & Information segment volumes grew an estimated 5 percent and 9 percent in the third and fourth quarters of 2015. Pressure Sensitive Materials segment expanded an estimated 5 percent and 7 percent over the same period. Though Avery may benefit from lower raw material costs in the second quarter, Zekauskas noted that benefit will reduce by August assuming propylene prices remain at current levels of $0.31/lb. "Accordingly, we think Avery's profit outlook could be somewhat weaker following its 2Q:16 EPS report," Zekauskas highlighted. As a result, the analyst cut his 2016 EPS estimate to $3.80 from $3.85 and 2017 EPS forecast to $4.15 from $4.20. The analyst noted that there has been some insider selling at Avery. On the positive side, the analyst estimates that Avery's recent Mactac acquisition would double Avery's exposure in the Graphics end market in Europe. Zekauskas expects Avery to generate $345 million in free cash flow in 2016, and to return a larger $490 million via share buybacks and dividends in 2016. "We rate Avery Neutral for year-ahead price performance," said Zekauskas who also cut the price target to $78 from $80. Shares of Avery Dennison closed Thursday's regular trading session at $74.62.