Technology

Why Is Avery Dennison (AVY) Down 1.4% Since Last Earnings Report?

A month has gone by since the last earnings report for Avery Dennison (AVY). Shares have lost about 1.4% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Avery Dennison due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Avery Dennison Q2 Earnings & Revenues Beat Estimates

Avery Dennison reported second-quarter 2020 adjusted earnings of $1.27 per share, surpassing the Zacks Consensus Estimate of $1.12. However, the figure declined 26% year over year.

Including one-time items, the company reported net income of 95 cents per share compared with $1.69 per share in the year-ago quarter.

Total revenues declined 15% year over year to $1,529 million. Nevertheless, the top line beat the Zacks Consensus Estimate of $1,512 million. Sales declined 13.7% on an organic basis.

Cost of sales in the quarter declined 13% year over year to $1,146 million. Gross profit slumped 21% year over year to $383 million. Gross margin contracted 180 basis points year over year to 25.1% in the second quarter.

Marketing, general and administrative expenses were $219 million compared with the $266 million incurred in the year-ago quarter. Adjusted operating profit amounted to $164 million, down from the $217 million in the prior-year quarter. Adjusted operating margin was 10.7% in the quarter, down from the prior-year quarter’s 12.1%.

Segment Highlights

Revenues in the Label and Graphic Materials (LGM) segment declined 9% year over year to $1,102 million. On an organic basis, sales were down 4.9%. Adjusted operating profit dipped 2% year on year to $163 million.

Revenues in the Retail Branding and Information Solutions (RBIS) segment plunged 30% year over year to $295 million. On an organic basis, sales were down 35.5% hurt by site closures and lower apparel demand. The segment’s adjusted operating income tanked 96% year over year to $2.2 million.

Net sales in the Industrial and Healthcare Materials (IHM) segment amounted to $132 million, down 23% from $171 million reported in the prior-year quarter. On an organic basis, sales were down 20.9% on decline in industrial categories driven by automotive. .The segment reported adjusted operating income of $9 million compared with the prior-year quarter’s $17.9 million.

Financial Updates

Free cash flow in the first half of 2020 for the company was $109 million, down 34% from the prior year comparable period. Avery Dennison had cash and cash equivalents of around $262.6 million as of Jun 27, 2020, up from $247 million as of Jun 29, 2019. As of Jun 30, 2020, the net debt to adjusted EBITDA ratio was 2.1 as of the end of the second quarter, below the company’s long-term target of 2.3-2.6. Avery Dennison currently has $800 million available under its revolving credit facility, and approximately $260 million in cash and cash equivalents on hand at quarter-end.

The company has initiated cost control and cash management actions to negate weak demand in few of its businesses, and is aiming to deliver free cash flow of approximately $500 million in 2020.

Cost-Reduction Activities

Avery Dennison realized $15 million in pre-tax savings from restructuring in the second quarter. The company anticipates incremental savings from restructuring actions of $60-$70 million during 2020. Carryover savings, net of transition costs, of approximately $70 million is projected for 2021. On top of this, the company is targeting net temporary savings of approximately $150 million in 2020, over half of which has been realized in the first half of the year.

Guidance

Avery Dennison expects sales and earnings to fall in 2020 on lower demand. In the third quarter, the company anticipates a decline in sales of 5-7%, before the impact of currency translation. Organic sales is expected to decline 7-9% in the quarter.

 

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates review. The consensus estimate has shifted 7.85% due to these changes.

VGM Scores

At this time, Avery Dennison has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Avery Dennison has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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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.

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