On Jan 15, we issued an updated research report on Avery Dennison Corporation (NYSE:AVY) . The company’s performance will be backed by its focus on pricing actions, restructuring activities and acquisitions. However, its results might be affected by softer China automotive market and unfavorable currency translation.
Let’s illustrate these factors in detail.
Restructuring Activities to Aid Avery Dennison
Avery Dennison’s restructuring actions associated with the consolidation of the European footprint of its Label and Graphic Materials segment will drive higher returns for the same. The plan, which is anticipated to close by 2019, includes net reduction in headcount of roughly 150 positions, shutdown or movement of several coating assets and the closure of a plant in Schwelm, Germany. The company anticipates realizing around $25 million in annualized savings from this plan beginning 2020.
Focus on Pricing Actions
Avery Dennison witnessed wider-than-anticipated margin contraction in the Label and Graphic Materials segment during the September-end quarter due to raw material inflation. The company announced pricing actions to combat inflation. Thus, it anticipates margin recovery in fourth-quarter 2018 on a seasonally adjusted basis.
M&A Activity: A Key Catalyst
Avery Dennison will continue to increase the pace of investment for leveraging specialty labels, graphics and reflective solutions business as demonstrated by the acquisitions of Mactac Europe, Hanita Coatings and Ink Mill. The company acquired Yongle Tape Company Ltd., a manufacturer of specialty tapes and related products used in a variety of industrial markets including the global automotive industry. Avery Dennison has also acquired Longford, Ireland-based Finesse Medical, a maker of materials used for wound care and skin treatments. All these buyouts are in sync with the company’s strategy to accelerate its portfolio shift to higher-value categories.
Softer China Automotive Market a Concern
Avery Dennison’s IHM segment witnessed disappointing results in third-quarter 2018 as sales fell way below management’s expectations and also declined on a year-over-year basis. This was largely due to wider-than-anticipated decreases in China due to a dismal automotive market. The company expects a weak China automotive market to prevail in fourth-quarter 2018 as well.
Unfavorable Currency Movements
Due to the strengthening of the U.S. dollar, currency translation is expected to leave a larger impact on Avery Dennison’s results in the fourth quarter.
Share Price Performance
Over the past year, Avery Dennison has performed almost in line with the industry. The stock has lost 21.1% compared with the industry’s decline of 21.3%.
Zacks Rank & Key Picks
Avery Dennison carries a Zacks Rank #3 (Hold). A few better-ranked stocks in the same sector are Alarm.com Holdings, Inc. (NASDAQ:ALRM) , Axon Enterprise, Inc (NASDAQ:AAXN) and CECO Environmental Corp. (NASDAQ:CECE) . While Alarm.com and Axon sport a Zacks Rank #1 (Strong Buy), CECO carries a Zacks Rank #2 (Buy).You can see the complete list of today’s Zacks #1 Rank stocks here.
Alarm.com has a long-term earnings growth rate of 17%. The stock has rallied 47% over the past year.
Axon has a long-term earnings growth rate of 25%. Shares of the company have soared around 78% in a year’s time.
CECO has a long-term earnings growth rate of 15%. The stock has surged 40% over the past year.
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