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Here's Why You Should Retain Avery Dennison (AVY) For Now

Avery Dennison (AVY) is worth retaining in one's portfolio owing to high packaging demand for essential products, investment in high-value products and positive projections.

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This story originally appeared on Zacks

Avery Dennison Corporation AVY is benefiting from the pandemic-driven demand for essential categories and e-commerce growth. Strong growth in high-value products, anticipated benefits from cost-reduction actions and focus on investments and acquisitions bode well.

Earnings & Sales Top Estimates in Q3: Avery Dennison, currently carrying a Zacks Rank #3 (Hold), reported third-quarter 2021 adjusted earnings per share (EPS) of $2.14, beating the Zacks Consensus Estimate of $2.07. The bottom line increased 12% year over year. Revenues of $2.07 billion surpassed the Zacks Consensus Estimate of $1.98 billion and rose 19.8% year over year.

Positive Earnings Surprise History: Avery Dennison has a trailing four-quarter earnings surprise of 9.02%, on average.

Positive Growth Expectations: The company’s earnings estimate for the current year is pegged at $8.94, suggesting year-over-year growth of 25.9%.

Upbeat View: In the third-quarter earnings call, Avery Dennison raised its adjusted EPS guidance for 2021 to the band of $8.80-$8.95 from the previous estimate of $8.65-$8.95. The company reported an adjusted EPS of $7.10 in 2020.

Superior Return on Assets: Avery Dennison currently has a Return on Assets (“ROA”) of 11.4%, higher than the industry’s 4%. An above-average ROA denotes that the company is generating earnings by effectively managing its assets.

Return on Equity: Avery Dennison’s trailing 12-month ROE supports its growth potential. The company’s ROE of 46.2% compares favorably with the industry’s average ROE of 11.4%, reflecting that it efficiently utilizes shareholders’ funds.

Price Performance: Avery Dennison’s shares have gained 46.4% in the past year compared with the industry’s growth of 36.3%.

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Zacks Investment ResearchImage Source: Zacks Investment Research

Growth Drivers

Labeling of non-durable consumer goods, like food, beverage, home and personal care products, accounts for around 40% of Avery Dennison’s revenues. The company has been witnessing soaring demand for these products amid the pandemic. Over the long run, increasing demand from emerging markets on the back of the rising middle class, and the consequent surge in demand for packaged goods and a shift in the labeling technology to pressure-sensitive materials will fuel the company’s growth. Apart from these, around 15% of its revenues is tied to logistics and shipping, which will be aided by a rise in e-commerce activities.

The company’s Label and Graphic Materials segment is gaining from healthy demand for consumer-packaged goods and e-commerce trends in the Label and Packaging Materials business. The Graphics and Reflective Solutions business is witnessing a strong rebound in demand from last year’s decline. In the current year, the segment is well poised to benefit from solid top-line growth and margin expansion, volume improvement, focus on high-value categories led by specialty labels and contributions from productivity initiatives.

Avery Dennison will benefit from its rapidly-growing high-value product categories, particularly Intelligent Labels, Radio-frequency identification (RFID) and core apparel label business, as retailers and brands gear up for a solid rebound in the end-market demand, with strength in the value and performance channels and double-digit growth in external embellishments. These factors are contributing to the Retail Branding and Information Solutions (RBIS) segment. In addition, the company is focused on investing in digital identification technologies. In sync with this, the company acquired Vestcom for $1.45 billion to expand the company’s foothold in high-value categories, while adding channel access and data-management capabilities to RBIS that have the potential to advance the Intelligent Labels strategy.

The Industrial and Healthcare Materials segment is gaining from the rebound in demand for industrial products and focus on investments. Management has undertaken temporary initiatives to reduce costs and negate the impact of weak demand in some of its businesses due to the COVID-19 pandemic. It anticipates incremental savings from restructuring actions, net of transition costs, of $60-$65 million in the ongoing year.

However, Avery Dennison is witnessing raw material, labor and freight cost inflation, which might dent its margins in the fourth quarter and first-quarter 2022. The company is responding to the cost increases through a combination of product reengineering and pricing, and announced additional price increases in most of its businesses across the world. The supply chain is likely to remain tight due to spike in coronavirus cases, especially in South Asia, which is likely to impact the company’s end-market demand.

Stocks to Consider

Some better-ranked stocks in the Industrial Products sector are Encore Wire Corporation WIRE, SPX FLOW, Inc. FLOW and Casella Waste Systems, Inc. CWST. All of these stocks flaunt a Zacks Rank #1 (Strong Buy), at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Encore Wire has an expected earnings growth rate of around 491% for the current year. The Zacks Consensus Estimate for current-year earnings has been revised 37% upward in the past 60 days.

Encore Wire’s shares have surged 171% in the past year. The company has a trailing four-quarters earnings surprise of 271%, on average.

SPX FLOW has a projected earnings growth rate of around 101.3% for 2021. The Zacks Consensus Estimate for current-year earnings has been revised upward by 5.3% in the past 60 days.

The company’s shares have appreciated 56.9% in a year. SPX FLOW has a trailing four-quarter earnings surprise of 40.4%, on average. FLOW has a long-term earnings growth of 35.2%.

Casella Waste has an estimated earnings growth rate of around 6% for the current year. In the past 60 days, the Zacks Consensus Estimate for current-year earnings has been revised upward by 11.4%.

The company’s shares have increased 44% in the past year. Casella Waste has a trailing four-quarter earnings surprise of 42.1%, on average. CWST has a long-term earnings growth of 14.2%.



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