Avery Dennison Continues to be a Market Leader

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Dec 10, 2014

In this article, let's take a look at Avery Dennison Corporation (AVY, Financial), a $4.54 billion market cap company that is a leading worldwide manufacturer of pressure-sensitive adhesives and materials, labels and retail systems.

The industry

The containers and packaging industry consists of companies which manufacture and distribute paper, plastic, metal and glass packaging products, cardboard containers, corrugated boxes, cans, bottles, plastic and foam food containers. It is capital intensive and is characterized by a global annual growth rates between 3.0% and 3.5%. Here we can appreciate the evolution of revenues in the last ten-year period:

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The company

The company produces pressure-sensitive material, and it is a global leader. Also, it is one of the world's largest producers of graphic tags and labels for apparel and consumer goods companies. It operates through three segments include: Pressure-sensitive Materials; Retail Branding and Information Solution and other specialty converting businesses.

The PSM segment accounts for about 70% of revenue, demonstrating that it is the primary driver for growth. At least doubling its peers in this segment, the firm has a good position thanks to the decision of management to focus on markets such as China.

We think that emerging markets are key areas for growth in the other segment, the retail branding and information solutions. The margins have improved due to a successful cost-cutting plan.

Revenues, margins and profitability

Looking at profitability, revenue grew by 3.63% and led earnings per share increased in the most recent quarter compared to the same quarter a year ago ($0.68 vs $0.62). During the past fiscal year, the company increased its bottom line. It earned $2.43 versus $1.52 in the previous year. This year, Wall Street expects an improvement in earnings ($3.03 versus $2.43).

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Ticker Company ROE (%)
AVY Avery Dennison Corporation 15.12
SEE Sealed Air Corp 15.59
SON Sonoco Products Co 14.12
BMS Bemis Co Inc 11.28
PKG Packaging Corp of America 37.67
 Industry Median 7.89

The company has a current ROE of 15.12% which is higher than the industry median and the ones exhibit by Sonoco Products (SON, Financial) and Bemis (BMS, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Sealed Air Corp. (SEE, Financial) could be the option. For a higher ratio, we recommend looking at Packaging Corp. of America (PKG, Financial). It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.

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Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 21.8x, trading at a discount compared to an average of 24.3x for the industry. To use another metric, its price-to-book ratio of 3.5x indicates a premium versus the industry average of 1.94x while the price-to-sales ratio of 0.8x is below the industry average of 1.07x.

As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $15.124, which represents a 8.8% compound annual growth rate (CAGR).

03May20171235151493832915.png

Final comment

The firm continues to be a market leader in the PSM segment. Further, operations in emerging markets should offset some weakness in the demand.

The PE relative valuation and the return on equity that significantly exceeds the industry average and make me feel bullish on this stock.

Hedge fund gurus like Ray Dalio (Trades, Portfolio) and Robert Olstein (Trades, Portfolio) added this stock to their portfolios in the third quarter of 2014, as well as Manning & Napier Advisors, Inc and NWQ Managers (Trades, Portfolio).

Disclosure: Omar Venerio holds no position in any stocks mentioned