In this article, let's take a look at Avery Dennison Corporation (AVY, Financial), a $4.88 billion market cap company.
International Exposure
The company is a global leader of producing pressure-sensitive materials, along with a variety of tickets, tags, labels other converted products and office and consumer products. The Pressure-Sensitive Materials segment accounts for almost 70% 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.
The company has an extremely good position to succeed in high promising markets, such as China, in which it first arrived in 1995.
The management focuses on building profitable operations and it has the objective of 3% to 5% annualized sales growth for this segment and for adjusted operating margins to reach a rate of 10% in three years.
Stronger Competition
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. Some analysts believe that the firm doesn’t have clear advantages over the rest of its peers.
Revenues, Margins and Profitability
Looking at profitability, revenues rose by 1.31% and earnings per share increased in the most recent quarter compared to the samequarter a year ago ($0.75 vs $0.45).
During the past fiscal year, the company increased its bottom line. It earned $2.62 versus $2.43 in the previous year. This year, Wall Street expects an improvement in earnings ($3.30 versus $2.62). The net income increased by 66% when compared to the same quarter one year prior, rising from $42.70 million to $70.90 million.
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 | 15.12 |
| SEE | Sealed Air Corp | 18.99 |
| MWV | MeadWestvaco Corp | 7.41 |
| PKG | Packaging Corp of America | 26.78 |
| SON | Sonoco Products Co | 14.12 |
| Â | Industry Median | 7.65 |
The company has a current ROE of 15.12% which is higher than the industry median. Also, it is higher than the ones exhibit by MeadWestvaco Corp (MWV, 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, Sealed Air Corp (SEE, 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.
| Year | ROE (%) |
| Dec04 | 19.51 |
| Dec05 | 14.82 |
| Dec06 | 23.27 |
| Dec07 | 16.47 |
| Dec08 | 14.23 |
| Dec09 | -47.98 |
| Dec10 | 21.07 |
| Dec11 | 11.51 |
| Dec12 | 13.30 |
| Dec13 | 14.04 |
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 23.6x, trading at a discount compared to an average of 24.50x for the industry. To use another metric, its price-to-book ratio of 3.81x indicates a premiumversus the industry average of 1.91x while the price-to-sales ratio of 0.83x is belowthe industry average of 1.17x.
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 $19.615, which represents a 14.4% compound annual growth rate (CAGR).
http://www.gurufocus.com/chart/AVY#&serie=,,id:per_share_eps,s:AVY"> src="http://chart.gurufocus.com/1425398914905.png" />
As we can appreciate, the firm has demonstrated a pattern of positive earnings per share growth over the past two years.
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 gurus Joel Greenblatt (Trades, Portfolio), Jim Simons (Trades, Portfolio), John Hussman (Trades, Portfolio) and Pioneer Investments (Trades, Portfolio) bought the stock while Robert Olstein (Trades, Portfolio), Manning & Napier Advisors, Inc., and RS Investment Management (Trades, Portfolio) have added this stock to their portfolios in the fourth quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned
