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A ‘Dog’ you can Love – Avery Dennison Corp.

August 13, 2009 | About:
Avery Dennison [NYSE:AVY] August 13, 2009: $27.34

52-week range: $17.02 (Mar. 9, 2009) - $50.14 (Sep. 8, 2008)

Dividend = $0.20 quarterly = 2.92% current yield


Avery Dennison produces pressure-sensitive materials, office products and a variety of tickets, tags, labels and other products. It also manufactures and sells a variety of office products such as binders, organizing systems, markers, fasteners, business forms, as well as tickets, tags, radio-frequency identification inlays, and imprinting equipment for retail and apparel manufacturers.

The recession has severely impacted AVY’s sales and earnings. Consensus views for 2009 – 2010 now center on $1.75 and $2.33 versus 2008’s $3.30/share. The dividend was cut from $0.41 quarterly to a more sustainable $0.20 rate in the latest quarter.

With all that bad news why should we be interested in Avery Dennison now? It’s cheap by all historical measures. Even the reduced dividend produces a 2.92% current yield. That looks good in a time when bank CDs pay 1 – 2% and money markets pay virtually zero.

AVY earned between $2.47 - $3.91 per share in each of the 10 calendar years 1999 – 2008. Once business conditions improve their normalized earnings power is well established. Value Line sees a rebound to $3.50 /share over the next 3 – 5 years. They also see a long-term multiple of 16 for AVY shares.

Value Line rates AVY’s financial strength as ‘A’, their safety as ‘above average’ and both their ‘stock price stability’ and ‘earnings predictability’ percentiles are in the top 15% of Value Line’s 1700 stock universe. S&P gives AVY a ‘B+’ quality ranking and a $30 one-year price target.

Here’s a very conservative play with AVY from here to January 15, 2010:

..............................................Cash Outlay ...... Cash Inflow

Buy 1000 AVY @$27.34 ............. $27,340

Sell 10 Jan. $25 Calls @$3.80 .............................. $3,800

Sell 10 Jan. $25 Puts @$1.75 ............................. .$1,750

Net Cash Out-of-Pocket .............. $21,790


If Avery Dennison merely stays above $25 through Jan. 15, 2010:

• The $25 calls will be exercised.

• You will sell your shares for $25,000.

• The $25 puts will expire worthless.

• You will likely have collected $400 in dividends.

• You will have no further option obligations.

• You will end up with no shares and $25,400 in cash.

That’s a best-case scenario total return of $3,610 / $21,790 = 16.5%

achieved in about 5.6 months on shares that:

• Went up.

• Stayed unchanged.

• Declined by up to 8.5% (to $25).


What’s the break-even on the whole trade?

On the first 1000 shares it’s their $27.34 purchase price less

the $3.80 /share call premium = $23.54 /share.

On the ‘put’ shares it’s the $25 strike price less the

$1.75 /share put premium = $23.25 /share.

Your overall break-even would be $23.40 (excluding dividends)

and $23.20 /share (including the yield).

Conservative AVY shares could fall by up to 15.1% without

causing a loss on this trade.



Summary:


This buy/write combination accepts that Avery Dennison is likely to post lower Y/Y comps and uses in-the-money calls and out-of-the-money puts to protect on the downside. Total return of over 16% in less than 6 months looks pretty tempting, though, as you have better than a 15% margin of safety even if AVY shares decline between now and expiration date.


Disclosure: Author is long AVY shares and short AVY options.

About the author:

Dr. Paul Price
http://www.RealMoneyPro.com
http://www.MarketShadows.com
http://www.TalkMarkets.com

Visit Dr. Paul Price's Website


Rating: 2.3/5 (4 votes)

Comments

Dr. Paul Price
Dr. Paul Price premium member - 4 years ago
Aug 14, 2009, 7:19 a.m. EST

Avery Dennison upped to overweight at J.P. Morgan

(MarketWatch) -- Analysts at J.P. Morgan lifted their rating Friday on Avery Dennison Corp. (AVY 27.91, +0.48, +1.75%) to overweight from neutral and hiked their price target on the stock to $33 from $25.

In a note to clients, they wrote that they believe the Pasadena, Calif.-based provider of labels, retail tags, branding systems and office supplies "is well positioned for a period of margin expansion as demand rebounds from cyclically depressed levels." Shares of Avery Dennison ended Thursday at $27.43

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