What a brutal six months it’s been for Avery Dennison. The stock has dropped 24.1% and now trades at $165.51, rattling many shareholders. This was partly due to its softer quarterly results and might have investors contemplating their next move.
Is now the time to buy Avery Dennison, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Even with the cheaper entry price, we're swiping left on Avery Dennison for now. Here are three reasons why you should be careful with AVY and a stock we'd rather own.
Why Do We Think Avery Dennison Will Underperform?
Founded as Kum Kleen Products, Avery Dennison (NYSE: AVY) is a manufacturer of adhesive materials, display graphics, and packaging products, serving various industries.
1. Core Business Falling Behind as Demand Declines
Investors interested in Industrial Packaging companies should track organic revenue in addition to reported revenue. This metric gives visibility into Avery Dennison’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.
Over the last two years, Avery Dennison’s organic revenue averaged 1.5% year-on-year declines. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests Avery Dennison might have to lean into acquisitions to grow, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus). 
2. EPS Barely Growing
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Avery Dennison’s EPS grew at an unimpressive 7.4% compounded annual growth rate over the last five years. On the bright side, this performance was better than its 4.4% annualized revenue growth and tells us the company became more profitable on a per-share basis as it expanded.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Avery Dennison’s ROIC has unfortunately decreased. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
We see the value of companies helping their customers, but in the case of Avery Dennison, we’re out. Following the recent decline, the stock trades at 15.7× forward price-to-earnings (or $165.51 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better opportunities elsewhere. We’d suggest looking at one of our top digital advertising picks.
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