Avery Dennison (AVY) Down 15.4% Since Last Earnings Report: Can It Rebound?

It has been about a month since the last earnings report for Avery Dennison (AVY). Shares have lost about 15.4% 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 its most recent earnings report in order to get a better handle on the important catalysts.

Avery Dennison's Q4 Earnings Beat, Sales Lag Estimates

Avery Dennison reported adjusted earnings of $1.73 per share in fourth-quarter 2019, surpassing the Zacks Consensus Estimate of $1.68. The figure also increased around 13.8% year over year.

Including one-time items, the company posted net income of $1.92 per share compared with the year-ago quarter’s earnings per share (EPS) of $1.11.

Total revenues inched up nearly 0.2% year over year to $1,772.9 million. The top-line figure, however, missed the Zacks Consensus Estimate of $1,784 million. Organic sales growth came in at 2.1% in the reported quarter.

Cost of sales in the quarter edged down nearly 0.7% year over year to $1,288.2 million. Gross profit rose 2.8% year over year to $484.7 million. Gross margin increased to 27.3% from the prior-year quarter’s 26.6%.

Marketing, general and administrative expenses totaled $273.1 million compared with the $274.5 million incurred in the year-ago quarter. Adjusted operating profit came in at $212 million, up from the $197 million recorded in the prior-year quarter. Adjusted operating margin rose to 11.9% from the year-earlier quarter level of 11.1%.

Segment Highlights

Revenues in the Label and Graphic Materials segment dipped 0.4% year over year to $1,176.2 million. On an organic basis, sales inched up 1.5%. Adjusted operating profit was up 2.6% year on year to $156 million.

Revenues in the Retail Branding and Information Solutions segment rose 3.6% year over year to $426.9 million. On an organic basis, sales were up 5.2%, as consistent strength in RFID and external embellishments. The segment’s adjusted operating income increased 15.5% to $58.1 million.

Net sales in the Industrial and Healthcare Materials segment amounted to $169.8 million, indicating a year-over-year decline of 3.1%. On an organic basis, sales were down 1.1%. The downside resulted from a mid-single digit decline in healthcare categories, partly offset by a low-single digit increase in industrial categories. The segment reported adjusted operating income of $17.4 million compared with the prior-year quarter’s $16.8 million.

Financial Updates

Avery Dennison had cash and cash equivalents of around $254 million at the end of 2019, up from $232 million at the end of 2018. During 2019 the company generated $746.5 million in cash from operating activities compared with the $457.9 million reported last year.

During the fourth quarter, Avery Dennison repurchased 0.3 million shares for a total cost of $33 million. In 2019, the company repurchased 2.2 million shares for a total cost of $238 million. The company’s share count declined 1.5 million for the year. In 2019, the company returned $427 million cash to shareholders through share repurchases and dividends.

The company’s long-term debt decreased to $1,499.3 million as of Dec 28, 2019 compared with $1,771.6 million as of Dec 29, 2018.

The company’s board has announced a quarterly cash dividend of 58 cents per share. The dividend is payable on March 18, to shareholders of record on Mar 4, 2020.

Cost-Reduction Activities

Avery Dennison realized around $18 million in pre-tax savings from restructuring in the December-end quarter. The company incurred pre-tax restructuring charges of nearly $29 million. For the full year, the company realized around $53 million and incurred pre-tax restructuring charges of nearly $50 million.

2019 Performance

Adjusted earnings per share for 2019 came in at $6.60, marking an improvement of 9% from the prior year. Earnings also surpassed the Zacks Consensus Estimate of $6.55. Including one-time items, earnings summed $3.57, down 32% year over year.

In 2019, revenues came in at $7.07 billion, reflecting a year-over-year decline of 1.2%. The top-line figure came in line with the Zacks Consensus Estimate. Organic sales growth was 2% during the year.

Guidance

For 2020, Avery Dennison expects adjusted EPS of $6.90-$7.15. Including restructuring charges and other items, the company predicts EPS to be $6.75-$7.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision.

VGM Scores

Currently, Avery Dennison has a great Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Charting a somewhat similar path, 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 A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

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