Avery Dennison Is a Top Major PSM company

In this article, let's take a look at Avery Dennison Corporation (AVY, Financial), a $4.55 billion market cap company, which is a leading worldwide manufacturer of pressure-sensitive adhesives and materials, labels, and retail systems.

The biggest

The company is a global leader producing pressure-sensitive materials, and a variety of tickets, tags, labels other converted products, and office and consumer products. The Pressure-Sensitive Materials segment accounts for more than two-thirds of total revenues and contribute to about 90% of continuing operating profits. This segment more than doubled the one of UPM Raflatac, and it is six times larger than the third-largest vendor, Bemis/MACTac.

PSM segment

The company has an extremely good position to succeed in high promising markets, such as China. The management focuses on building profitable operations and it has the objective of 3% to 5% annualized sales growth for this segment. We must mention that if this segment improves the margins, additional competition can arise, due to the low capital requirements of the business to enter into it.

RBIS Segment

The other segment, the Retail Branding and Information Solutions segment, which accounted for 26% of 2013 sales, focuses on branding and information solutions to retailers, brand owners, apparel manufacturers, distributorsand industrial customers on a global basis.

Due to effective strategies to lower costs, the segment´s margins have improved in the last time and they are expected to be between 6.5% and 7.5% in the medium term.

But the firm must continue working hard because growth remains below management's expectations from a few years ago. Competition includes Checkpoint Systems, Inc. (CKP), R-pac International Corporation, and SML Group Limited.

Revenues, margins and profitability

Looking at profitability, revenue growth by 4.09% but earnings per share decreased in the most recent quarter compared to the same quarter a year ago ($0.46 vs $0.70).

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.

The company has a current ROE of 14.5% which is higher than the industry median. Also, it is higher than the ones exhibit by Sealed Air Corp (SEE, Financial) and Sonoco Products Co (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, MeadWestvaco Corp (MWV, Financial) and 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.

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 23.4x, trading at a discount compared to an average of 24.20x for the industry. To use another metric, its price-to-book ratio of 3.20x indicates a premiumversus the industry average of 1.87x while the price-to-sales ratio of 0.8x is belowthe industry average of 1.06x.

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 $18.598, which represents a 13.2% compound annual growth rate (CAGR).

Final comment

The PSM segment could be hurt if margins improve, so we think competitors enter rapidly, forcing margins to lower. This is the risk the company faces, but we have seen several strengthens too.

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

Hedge fund guru Paul Tudor Jones (Trades, Portfolio) and the funds, Manning & Napier Advisors, Inc. and NWQ Managers (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014.

Disclosure: Omar Venerio holds no position in any stocks mentioned