High Value Categories And Intelligent Labels Will Signal Future Success

Key Takeaways

• Expansion into high-value categories and strategic investments in intelligent labels drive growth, revenue, and margin improvements.
  
• Strong balance sheet and productivity enhancements bolster investment flexibility and safeguard future earnings against economic challenges.
  
• Shifting trade policies and tariffs create revenue uncertainty in the apparel segment, complicating forecasts and potentially causing earnings volatility.

Catalysts

Operates as a materials science and digital identification solutions company in the United States, Europe, the Middle East, North Africa, Asia, Latin, America, and internationally.

• Avery Dennison's strategy of expanding its position in high-value categories, such as Graphics and Reflective Solutions and industrial tapes, is resulting in high single-digit organic growth, which should positively impact future revenue and margins.
  
• The company's strategic collaboration with Kroger in the food segment for intelligent labeling is on track, with pilots at other large-scale grocery chains indicating potential for increased revenue from this initiative.
  
• Avery Dennison is investing in its Intelligent Labels platform, with expectations of significant industry growth driving future revenue, especially as the technology is increasingly adopted by retailers for digital identity solutions.
  
• With a strong balance sheet and disciplined capital allocation strategy, Avery Dennison has flexibility to invest in growth initiatives, supporting future earnings expansion and enhanced economic value added (EVA).
  
• The company's emphasis on productivity improvements and strategic sourcing adjustments positions it well to mitigate potential tariff impacts, preserving net margins and protecting future earnings amidst economic uncertainties.

Avery Dennison Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Avery Dennison's revenue will grow by 3.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.1% today to 9.7% in 3 years time.
• Analysts expect earnings to reach $944.4 million (and earnings per share of $11.83) by about April 2028, up from $704.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.8x on those 2028 earnings, down from 19.6x today. This future PE is lower than the current PE for the US Packaging industry at 20.8x.
• Analysts expect the number of shares outstanding to decline by 1.94% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.35%, as per the Simply Wall St company report.

Avery Dennison Future Earnings Per Share Growth

Risks

• The impact of changing tariffs, including their potential reversion to higher levels, creates uncertainty in demand, particularly impacting the apparel segment, and this macro uncertainty makes it difficult to predict full-year results, potentially affecting revenue stability and forecasting.
  
• Apparel sales in China, specifically for garments exported to the U.S., represent a significant portion of the company's revenue, and any shifts in sourcing or continued high tariffs could create volatility and impact earnings.
  
• The dynamic trade policy environment and near-term global GDP outlook reductions create a challenging backdrop, affecting discretionary categories and making revenue projections uncertain.
  
• The indirect impacts of trade policy could affect macro demand, especially for discretionary items, which could lead to fluctuations in revenue and margins in the short term.
  
• The company indicates a reluctance to provide annual guidance due to heightened uncertainty, suggesting potential volatility in future earnings, influenced by external economic conditions and internal operational challenges.

Valuation

• The analysts have a consensus price target of $199.397 for Avery Dennison based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $236.0, and the most bearish reporting a price target of just $169.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $9.8 billion, earnings will come to $944.4 million, and it would be trading on a PE ratio of 18.8x, assuming you use a discount rate of 6.4%.
  
• Given the current share price of $174.83, the analyst price target of $199.4 is 12.3% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.