Innovative Labels And Global Expansion Poised To Skyrocket Sales And Earnings

Key Takeaways

• Avery Dennison's focus on Intelligent Labels, expansions in Europe and Asia, and innovations aim to drive revenue, margins, and long-term earnings growth.
  
• Strategic investments in high-value categories and digital identity innovations are expected to strengthen its market position and enhance profitability.
  
• Dependence on regional market performances and increasing raw material costs, combined with uncertain consumer demand, could significantly affect revenue and profit 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.

• Increasing adoption and volume growth in the Intelligent Labels (IL) platform, particularly in apparel and new categories, is expected to drive substantial mid-teens sales growth, positively impacting revenue.
  
• Label and Material Group's resilience and volume expansion in European and Asian markets indicate potential for continued revenue growth, especially with margin expansion due to productivity improvements.
  
• Expansion of Solutions Group margins, driven by top-line growth in high-value categories and productivity initiatives, suggests a positive impact on net margins and earnings.
  
• The strategic focus on high-value categories and base business profitability, along with effective capital allocation and productivity focus, points to long-term earnings growth and margin improvements.
  
• Investments in innovation and leadership in connecting physical items with digital identities forecast to enhance Avery Dennison's competitive edge, growing the industry size and its market share, leading to revenue and earnings growth.
  

Assumptions

• Analysts are assuming Avery Dennison's revenue will grow by 5.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.3% today to 9.3% in 3 years time.
• Analysts expect earnings to reach $932.7 million (and earnings per share of $11.91) by about August 2027, up from $630.6 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 23.9x on those 2027 earnings, down from 26.5x today. This future PE is greater than the current PE for the US Packaging industry at 23.7x.
• Analysts expect the number of shares outstanding to decline by 0.08% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 5.94%, as per the Simply Wall St company report.

Risks

• The reliance on specific regional performances, such as the significant rebound in Europe for the Materials Group, could pose a risk if these regions face economic downturns, impacting revenue.
  
• An increase in raw material costs, particularly paper in Europe, could compress margins if pricing actions fail to offset these increases, affecting net margins.
  
• The delay in customer rollouts, particularly for Intelligent Labels in new categories, introduces uncertainty around future revenue growth projections, potentially impacting earnings.
  
• Soft retail volumes and cautious near-term sourcing plans by retailers, despite normalization in apparel volumes, suggest vulnerability in consumer demand which could affect revenue and earnings growth.
  
• The competitive dynamics in the RFID (Intelligent Labels) sector and the need for continuous pricing actions to maintain or grow market share could impact profit margins if the company fails to effectively manage costs or if productivity gains are outpaced by price reductions.

Valuation

• The analysts have a consensus price target of $234.52 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 $166.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $10.0 billion, earnings will come to $932.7 million, and it would be trading on a PE ratio of 23.9x, assuming you use a discount rate of 5.9%.
  
• Given the current share price of $207.73, the analyst's price target of $234.52 is 11.4% 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.