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Avery Dennison (AVY) Q3 Earnings & Revenues Beat Estimates

Avery Dennison Corporation AVY reported third-quarter 2020 adjusted earnings of $1.91 per share, surpassing the Zacks Consensus Estimate of $1.54 by a margin of 24%. The bottom line also improved 15% year over year driven by enhanced demand across all segments and the company’s cost saving actions.

Including one-time items, the company reported net income of $1.79 per share compared with $1.71 per share in the year-ago quarter.

Total revenues decreased 2% year over year to $1,729 million. Nevertheless, the top line beat the Zacks Consensus Estimate of $1,705 million. Sales declined 3.6% on an organic basis.

Cost of sales in the quarter declined 3.5% year over year to $1,245 million. Gross profit increased 3% year over year to $484 million. Gross margin expanded 120 basis points year over year to 28% in the third quarter.

Marketing, general and administrative expenses were $258 million compared with $265 million incurred in the year-ago quarter. Adjusted operating profit amounted to around $226 million, up from the $206 million in the prior-year quarter. Adjusted operating margin was 13.1% in the quarter, up 140 basis points from the prior-year quarter.

Avery Dennison Corporation Price, Consensus and EPS Surprise

Segment Highlights

Revenues in the Label and Graphic Materials (LGM) segment declined 3.3% year over year to $1,145 million. On an organic basis, sales were down 2.6%. Adjusted operating profit increased 9% year on year to $175 million.

Revenues in the Retail Branding and Information Solutions (RBIS) segment increased 5% year over year to $426 million. On an organic basis, sales were down 4.7% as strong organic growth in high value categories were offset by an approximately 12% organic decline in the base business, thanks to overall lower apparel demand. The segment’s adjusted operating income rose 10% year over year to $51 million.

Net sales in the Industrial and Healthcare Materials (IHM) segment totaled $158 million, down 7% from $169 million in the prior-year quarter. On an organic basis, sales were down 7.6% on decline in industrial and healthcare categories. The segment reported adjusted operating income of $19.1 million compared with the prior-year quarter’s $18.6 million.

Financial Updates

Free cash flow in the first nine-month period of 2020 was $342 million, up from $327 million in the prior-year comparable period. The company expects to generate free cash flow of more than $500 million for the year.

Avery Dennison currently has $800 million available under its revolving credit facility and cash and cash equivalents of around $285 million as of Sep 26, 2020. As of the end of third-quarter 2020, Avery Dennison’s net debt to adjusted EBITDA ratio was 1.9, below the company’s long-term target of 2.3-2.6.

The company also announced that it raised its dividend by 7%. It has also resumed share repurchases in the third quarter. The company had temporarily paused its share repurchase program in March amid COVID-19 pandemic related uncertainty. Year to date, the company has bought back approximately 58,000 shares for $7 million.

Cost-Reduction Activities

In the wake of weak demand decline in some businesses, the company has undertaken temporary actions to reduce costs, which is also in sync with its focus on long-term strategic restructuring. This includes curtailment in travel and other discretionary spending, reduced usage of overtime and temporary employees, delays of merit increases, and furloughs.

Avery Dennison realized $13 million in pre-tax savings from restructuring in the third quarter. The company anticipates incremental savings from restructuring actions of $60-$70 million during 2020. Carryover savings, net of transition costs, of approximately $70 million is projected for 2021. On top of this, the company is targeting net temporary savings of approximately $150 million in 2020.

Guidance

Avery Dennison expects sales to fall in 2020 on lower demand. However, earnings for the full year will be higher than 2019 levels. For the fourth quarter, the company anticipates sales trend to come in-line or better than the decline witnessed in the third quarter.

Price Performance

Shares of Avery Dennison have gained 13.4% in the past year, against the industry’s decline of 6.3%.

Zacks Rank and Stocks to Consider

Avery Dennison currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the Industrial Products sector include Worthington Industries, Inc. WOR, Silgan Holdings Inc. SLGN and Fortune Brands Home & Security, Inc. FBHS. While Worthington Industries sports a Zacks Rank #1 (Strong Buy), Silgan and Fortune Brands Home & Security carry a Zacks Rank #2 (Buy), currently. You can see the complete list of today’s Zacks #1 Rank stocks here.

Worthington has an estimated earnings growth rate of 19.2% for 2020. The company’s shares have gained 41% in a year’s time.

Silgan has a projected earnings growth rate of 32% for the current year. Shares of the company have surged 25% in the past year.

Fortune Brands has an expected earnings growth rate of 6.9% for the ongoing year. The stock has appreciated 51% in the past year.

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Worthington Industries, Inc. (WOR): Free Stock Analysis Report
 
Silgan Holdings Inc. (SLGN): Free Stock Analysis Report
 
Avery Dennison Corporation (AVY): Free Stock Analysis Report
 
Fortune Brands Home Security, Inc. (FBHS): Free Stock Analysis Report
 
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