We have recently upgraded our recommendation on
Avery Dennison Corporation
) to Outperform from Underperform; following its strong third
quarter results, raised guidance driven by healthy organic growth
in both of the core segments - Pressure-Sensitive Materials and
Retail Branding and Information Solutions, market share gains and
new product introductions. Avery retains a short-term Zacks #1
Rank (Strong Buy), in line with our long term recommendation.
Avery Dennison witnessed 77% annual growth in its adjusted
earnings to 53 cents per share in the third quarter, comfortably
beating the Zacks Consensus Estimate of 45 cents. Revenues dipped
0.8% year-over-year to $1.49 billion but were ahead of the Zacks
Consensus Estimate of $1.487 billion.
In the third quarter, net sales increased approximately 6% on
an organic basis, the strongest organic growth since the first
quarter of 2011. Higher volumes for pressure sensitive materials
and a rebound in the core business of retail branding and
information solutions led to the increase. Sales of label and
packaging materials grew in every region, with the emerging
markets growing in the double-digit range.
Even though the retail branding and information solutions
segment had a modest start to the quarter but it finished very
strong in the month of September. Sales growth was the strongest
among US retailers and brand owners, driven by lower cotton
prices and RFID (radio frequency identification) adoption and
reflecting rising confidence for next year's spring season.
In order to attain its financial targets of double-digit
earnings growth and higher returns, Avery has aggressively
implemented a restructuring program in the second quarter of 2012
to reduce costs across all the business segments. The program is
anticipated to be completed by mid 2013 and is expected to
generate more than $100 million in annualized savings in 2013,
including $20 million by the end of 2012.
Avery has decided to divest its long-struggling Office and
Consumer Products segment, which has been plagued by weak end
market demand. Margins have been affected due to increased
investment in demand creation, consumer promotions, and
innovation, as well as lower volumes. Avery had earlier agreed to
divest the segment to its competitor 3M Company (MMM), but the
plan has been terminated by both parties.
Avery is currently looking for prospective buyers and intends
to use the proceeds to reduce debt, make additional pension
contributions and repurchase shares. With the weaker Office
Products business sold out, the company will be able to focus on
its market-leading, pressure-sensitive materials business, and
Retail Branding and Information Solutions segment.
The company has returned $312 million ($228 million as share
repurchases and $84 million as dividends) of cash to shareholders
in the first three quarters of 2012. As of September 29, 2012,
Avery had approximately $345 million worth of shares remaining
under its share buyback authorization. Avery has increased its
quarterly dividend by 8% to $0.27 this year, following a 25% hike
in 2011. Further share repurchases and dividend hikes could
fundamentally improve investor sentiment.
Pasadena, California-based Avery Dennison manufactures
pressure-sensitive materials, and a variety of tickets, tags,
labels other converted products. Avery has over 200 manufacturing
and distribution facilities encompassing more than 60 countries.
Its products are sold under the Avery, Avery Dennison, Avery
Graphics and Fasson brands. Its clientele is spread across the
U.S., Europe, Asia, Latin America and other regions. The company
operates through the Pressure-Sensitive Materials unit, the
Retail Branding and Information Solutions unit and the Other
Specialty Converting Businesses unit. Avery Dennison also
Bemis Company, Inc.
AVERY DENNISON (AVY): Free Stock Analysis
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