Why We're Not Concerned About Avery Dennison Corporation's (NYSE:AVY) Share Price

It's not a stretch to say that Avery Dennison Corporation's (NYSE:AVY) price-to-earnings (or "P/E") ratio of 20.8x right now seems quite "middle-of-the-road" compared to the market in the United States, where the median P/E ratio is around 19x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

With earnings growth that's superior to most other companies of late, Avery Dennison has been doing relatively well. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Check out our latest analysis for Avery Dennison

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Avery Dennison.

What Are Growth Metrics Telling Us About The P/E?

In order to justify its P/E ratio, Avery Dennison would need to produce growth that's similar to the market.

If we review the last year of earnings growth, the company posted a terrific increase of 40%. However, this wasn't enough as the latest three year period has seen a very unpleasant 1.7% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the eleven analysts covering the company suggest earnings should grow by 12% per annum over the next three years. Meanwhile, the rest of the market is forecast to expand by 11% per annum, which is not materially different.

With this information, we can see why Avery Dennison is trading at a fairly similar P/E to the market. Apparently shareholders are comfortable to simply hold on while the company is keeping a low profile.

What We Can Learn From Avery Dennison's P/E?

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Avery Dennison maintains its moderate P/E off the back of its forecast growth being in line with the wider market, as expected. At this stage investors feel the potential for an improvement or deterioration in earnings isn't great enough to justify a high or low P/E ratio. It's hard to see the share price moving strongly in either direction in the near future under these circumstances.

Before you settle on your opinion, we've discovered 2 warning signs for Avery Dennison that you should be aware of.

You might be able to find a better investment than Avery Dennison. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.