Intelligent Labels Expansion Will Unlock New Market Opportunities

Key Takeaways

• Strategic expansion in Intelligent Labels, particularly in food, logistics, and retail, positions Avery Dennison for future growth and potential margin improvements.
  
• Restructuring for cost savings and disciplined capital strategies aim to enhance net margins and boost earnings per share, benefiting investor returns.
  
• European market challenges and supply chain disruptions present risks to revenue and margins, while certain segments face growth pressures from logistical and environmental factors.

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 strategic collaboration with Kroger on food RFID technology is expected to drive significant growth in the Intelligent Labels segment, impacting future revenue by expanding into new market segments like food, which is a large addressable market.
  
• The company is well-positioned for future adoption of Intelligent Labels in new segments such as logistics and general retail, which could support consistent top-line growth, thereby increasing overall revenue.
  
• With a focus on expanding and accelerating the adoption of Intelligent Labels across various sectors, notably in apparel, logistics, and now food, there is potential for margin improvement as the technology scales and efficiencies are realized.
  
• Ongoing restructuring actions are expected to deliver more than $55 million in savings, which should enhance net margins and contribute to improved earnings.
  
• Avery Dennison's disciplined capital allocation along with share repurchases and dividends are expected to drive earnings per share (EPS) growth, positively impacting investor returns.

Avery Dennison Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Avery Dennison's revenue will grow by 5.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.8% today to 9.2% in 3 years time.
• Analysts expect earnings to reach $929.8 million (and earnings per share of $11.93) by about December 2027, up from $674.0 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 22.7x on those 2027 earnings, down from 22.8x today. This future PE is lower than the current PE for the US Packaging industry at 22.9x.
• Analysts expect the number of shares outstanding to decline by 1.02% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.04%, as per the Simply Wall St company report.

Avery Dennison Future Earnings Per Share Growth

Risks

• The European market is facing softer retail volumes due to persistent inflation, which could negatively impact the company's revenue in that region.
  
• The weaker consumer environment, particularly in Europe, poses a challenge to sustaining high volume growth, potentially pressuring net margins if costs aren't managed effectively.
  
• The Intelligent Labels segment experienced growth below expectations due to prior year customer inventory builds and logistics volume softness, which could affect earnings if similar issues occur again.
  
• The unrest in Bangladesh has caused interruptions in the apparel industry, presenting a risk to supply chain stability that could affect revenue and earnings.
  
• The drugstore channel, including challenges like store closures and hurricane impacts, showed softness for Vestcom, which might indicate longer-term risks to sales growth if these conditions persist.

Valuation

• The analysts have a consensus price target of $230.32 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 $275.0, 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 2027, revenues will be $10.1 billion, earnings will come to $929.8 million, and it would be trading on a PE ratio of 22.7x, assuming you use a discount rate of 6.0%.
• Given the current share price of $191.46, the analyst's price target of $230.32 is 16.9% 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.