Early 2025 Rollout Of Vestcom Solutions With CVS Health Will Drive Future Success

Key Takeaways

• Expansion in high-value categories and Intelligent Labels is poised to enhance revenue and net margins through organic sales growth and increased adoption.
  
• Strategic partnerships and sustainable innovations aim to maintain strong margins and improve competitive positioning, boosting revenue and earnings growth.
  
• Dependence on key segments and customers poses risks to revenue, while challenges in material costs and a weakened logistics sector could impact margins.

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 is driving outsized growth in high-value categories, which accounts for almost half of its portfolio, resulting in higher margins and contributing significantly to organic sales growth. This will likely impact revenue and net margins.
  
• The company expects strong growth in its Intelligent Labels division by 10% to 15% in 2025, driven by increased retail and logistics adoption, contributing to total company growth. This will positively impact revenue and earnings.
  
• Partnership with CVS Health for Vestcom shelf-edge solutions and the rollout in early 2025 is expected to deliver strong growth, improving revenue in this segment.
  
• Investments in materials group productivity improvements and sustainable innovations are expected to maintain strong EBITDA margins and enhance competitive positioning, impacting net margins positively.
  
• Expansion of high-value solutions in the Embelex platform, with strong growth expectations driven by increased demand for consumer personalization in sports, should drive revenue and earnings growth.

Avery Dennison Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Avery Dennison's revenue will grow by 3.9% 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 $953.4 million (and earnings per share of $11.99) by about March 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 19.4x on those 2028 earnings, down from 20.2x today. This future PE is lower than the current PE for the US Packaging industry at 22.4x.
• 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 6.38%, as per the Simply Wall St company report.

Avery Dennison Future Earnings Per Share Growth

Risks

• Sales growth in the logistics sector for Intelligent Labels is expected to decline slightly between 2024 and 2025, which could impact overall revenue growth.
  
• The reliance on high-value categories for growth means any delay or issue in these segments could significantly affect revenue and earnings, especially if new customer adoptions in Intelligent Labels are pushed into future years.
  
• Vestcom's sales were softer than anticipated in 2024, particularly due to lower volume in the drugstore channel as a result of store closures, which could hamper revenue and margin recovery if the trend persists.
  
• The reliance on a limited number of large customers for significant contracts, particularly in logistics and general retail, could pose risks if these customers face their own demand or volume challenges, potentially impacting revenue and earnings.
  
• Raw material cost inflation or deflation trends and their lagged impact on pricing and margins can affect net margins, particularly if deflation leads to a mismatch between material cost decreases and price reductions passed onto customers.

Valuation

• The analysts have a consensus price target of $207.274 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 $953.4 million, and it would be trading on a PE ratio of 19.4x, assuming you use a discount rate of 6.4%.
• Given the current share price of $179.93, the analyst price target of $207.27 is 13.2% 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.