Here's Why You Should Dump Avery Dennison From Your Portfolio

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Avery Dennison Corporation AVY has been underperforming the industry of late. Higher debt levels, raw material cost inflation and restructuring charges will dent margins in the near term.

Estimates Moving South

The estimates for the company for fiscal 2018 and fiscal 2019, have moved south in the past 60 days, reflecting the negative outlook of analysts. For fiscal 2018, the estimate has declined 0.3% to $5.99. For fiscal 2019, the estimate has decreased 0.6% to $6.51 per share.

Falling Behind the Industry

Avery Dennison has underperformed the industry it belongs to over the past year. The stock gained 10.6% while the industry rose 12%.

Expensive Valuation

Avery Dennison's stretched valuation is a concern. The trailing 12-month price earnings (P/E) ratio is 18.9 for the company while the industry's average trailing 12-month P/E ratio is lower at 17.3. This implies that the stock is overvalued.

Near-Term Headwinds Remain

Avery Dennison initiated a restructuring plan associated with the consolidation of the European footprint of its Label and Graphic Materials segment to ensure continued high returns for the segment and improve competitiveness. However, restructuring charges associated with the plan will dent second-quarter margins.

Further, higher debt levels following the Yongle and Finesse acquisitions remain a concern. Raw material cost inflation will also dent margins in the near term.

Though RFID (Radio-frequency identification) has strong growth potential, sales remain volatile on a quarterly basis as it is driven by timing of customer implementations.

Even though the Industrial and Healthcare Materials segment is expected to generate strong margins in the long term, its operating margin is currently bearing the brunt of the impact of acquisitions and growth-related investments along with a number of operational challenges.

Unfavorable Zacks Rank

Avery Dennison currently carries a Zacks Rank #4 (Sell).

Stocks to Consider

Some better-ranked stocks in the same sector are Actuant Corporation ATU , DMC Global Inc. BOOM and Chart Industries, Inc. GTLS . All three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here .

Actuant has a long-term earnings growth rate of 15.6%. Its shares have rallied 19% over the past year.

DMC Global has a long-term earnings growth rate of 20%. The company's shares have appreciated 268% in the past year.

Chart Industries has a long-term earnings growth rate of 26.9%. The stock has surged 77% in a year's time.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Symbols: ATU , GTLS , BOOM , AVY

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