On Dec 13, we maintained our Neutral recommendation on
Avery Dennison Corporation
), a pressure-sensitive materials producer and provider of wide
variety of information and brand management solutions. The
reiteration was based on expected benefits from restructuring
initiatives and divestiture of its underperforming Office and
Consumer Products unit. However, the positives may be offset by
concerns regarding uncertain macroeconomic environment and
Avery's underfunded pension liability.
Avery's adjusted earnings increased 35% year over year to 69
cents per share in the third quarter 2013. For 2013, Avery raised
its adjusted earnings forecast to the range of $2.60 to $2.70 per
share from the previous range of $2.40 to $2.60 per share. The
revised guidance represents annual growth of 33% to 38%.
Avery has aggressively implemented a restructuring program to
reduce costs across all business segments. As of the end of third
quarter 2013, cost cutting measures that have been implemented
were expected to yield approximately $110 million in annualized
savings. Avery has realized $20 million of these savings in 2012,
and expects the majority of the remainder of these savings to be
realized in 2013.
In Jan 2013, Avery agreed to divest its underperforming Office
and Consumer Products segment along with its Designed and
Engineered Solutions businesses to CCL Industries Inc., a global
leader in specialty packaging solutions. The net sale proceeds of
approximately $402 million will be utilized to repurchase shares
and reduce indebtedness. With the divestiture, the company will
be able to focus on its market leading, pressure-sensitive
materials business, and Retail Branding and Information Solutions
Avery remains committed to its long-term targets (by 2015) of
sales growth in the range of 3% to 5% and net income growth of
10-15%. Earnings per share growth of 15-20% is expected to be
achieved through continued growth in emerging markets and
On the flipside, even though Avery delivered organic growth of
4%, 5% and 3.6% respectively in the first, second and third
quarters of 2013, it remained lower than the 7% organic growth
rate in the fourth quarter of 2012 - the strongest organic growth
witnessed since the first quarter of 2011.
Going forward, Avery faces headwinds in the form of an uneven
macroeconomic environment and difficult comparisons in the fourth
quarter of 2013. For the Retail Branding and Information
Solutions segment, increased consumer uncertainty across North
America could be a headwind. Sales growth slowed in September,
particularly in North America, with a number of domestic
customers citing some softening of end market demand.
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Furthermore, Avery has a good exposure to Europe, which generates
one third of its total revenue from the region. The current
weakness in Europe remains a concern. Avery's total underfunded
pension liability is close to $300 million as of end of the third
quarter. This will curb the company's ability to ramp up its
capital expenditure and invest in growth options.
Other Stocks to Consider
Avery currently retains a Zacks Rank #2 (Buy). Some other stocks
worth considering in the sector include
Pitney Bowes Inc.
). All these stocks carry a Zacks Rank #2 (Buy).