Avery Dennison Reported Another Solid Quarter

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Aug 27, 2015

In this article, let's take a look at Avery Dennison Corporation (AVY, Financial), a $5.31 billion market cap company that is a leading worldwide manufacturer of pressure-sensitive adhesives and materials, labels and retail systems.

A principal player

The company is a global leader and one of the largest producers of graphic tags and labels for apparel and consumer goods companies. The PSM segment is very important to the generation of revenue and operating profits. Management has focused on international operations, in markets such as China, in which it first arrived in 1995.

Due to its low barriers to enter, if PSM margins become higher, it is possible additional competitors to enter the market.

Far below its peak

The board of directors has declared a quarterly cash dividend of $0.37 per share. At the actual current price, it yields 2.4% and is close to a three-year low. The dividend is payable Sept. 16 to shareholders of record on Sept. 2.

In the next graph we can see how dividends were cut.

03May20171005451493823945.jpg

Since the financial crisis, the management has been trying to rebuild the dividend. In 2014, the company generated $199 million in free cash flow. It paid $125 million in dividends, but it bought back $356 million in stock, so it has to take money from the cash. If the firm didn't spend too much buying back stock, it could raise its dividend to previous levels. In the second quarter, it repurchased 0.5 million shares at a cost of $28 million, so if we annualized it linearly, we obtain less than $120 million in line with our thoughts.

Revenues, margins and profitability

Revenues of $1.52 billion declined by 6.2% and earnings per share of $0.91 beat estimates by $0.03. Although higher raw material costs, operating margin improved to 11.7%. The company plans to obtain higher margin in the long-term. The radio-frequency identification (RFID) is a key market for growth, it is expected a growth in the range of 10% to 20% yearly in the next three years.

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 AveryDennison 23.86
SEE Sealed Air Corp 20.51
MWV MeadWestvaco Corp 7.83
PKG Packaging Corp of America 25.93
SON Sonoco Products Co 20.20
 Industry Median 7.65

The company has a current ROE of 23.86% which is higher than the industry median. Also, it is higher than the ones exhibit by MeadWestvaco Corp. (MWV, Financial), Sealed Air Corp. (SEE, Financial) and Sonoco Products (SON, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking at those levels, Packaging Corp. of America (PKG, Financial) could be the options. It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.

Quarter Ended Mar-13 Jun-13 Sep-13 Dec13 Mar-14 Jun-14 Sep-14 Dec14 Mar-15 Jun-15
ROE (%) 14.66 17.82 12.04 11.14 19.07 11.63 18.80 23.90 27.37 23.86

Relative valuation

In terms of valuation, the stock sells at a trailing P/E of 20.11x, trading at a premium compared to a median of 18.88x for the industry. To use another metric, its price-to-book ratio of 4.86x indicates a premium versus the industry median of 1.51x while the price-to-sales ratio of 0.87x is below the industry median of 0.93x.

03May20171005471493823947.jpg

As we can appreciate, the firm has demonstrated a pattern of positive earnings per share growth over the past two years.

Final comment

The company operates in a market where margins could improve, and competition become stronger. Meanwhile, Avery is achieving strong quarter results, which are crucial in order to increase its dividends in the future.

Paul Tudor Jones (Trades, Portfolio) initiated a new position in the stock with 8,100 shares and Jim Simons (Trades, Portfolio) upped his stake by 358.28% to 783,200 shares. On the other hand, Robert Olstein (Trades, Portfolio), Pioneer Investments (Trades, Portfolio), James Barrow (Trades, Portfolio) and Ray Dalio (Trades, Portfolio) sold out while Mariko Gordon (Trades, Portfolio), Manning & Napier Advisors, Inc, John Hussman (Trades, Portfolio), NWQ Managers (Trades, Portfolio) and RS Investment Management (Trades, Portfolio) have reduced their positions.

Disclosure: Omar Venerio holds no position in any stocks mentioned