Morningstar | Avery Bests Our Expectations in 2018; Generates Solid Margins and Shakes Tariff Fears
Avery defied lingering market fears of a weak quarter, with results reflecting no noticeable impact from the rise of tariffs around the world. Given that the company supplies labels, tags, and materials throughout numerous global supply chains, any interruptions to client businesses could impact Avery as well. While this remains a risk in the coming years, Avery has been unscathed so far. All three segments generated operating income slightly ahead of our expectations for the year, thanks primarily to wider-than-expected margins. Our expectation of higher near-term profits has led us to raise our fair value slightly to $87 per share from $86. Our no-moat rating remains in place.The labels and graphic materials business, or LGM, grew solidly throughout the year. Fourth-quarter organic sales were up nearly 5%, and almost 6% during the year. We think mid-single-digit growth rates should be manageable for the foreseeable future, as the company benefits from increased sales in emerging markets as they grow wealthier and e-commerce becomes more prevalent. However, we think investors should be cautious about long-term margin expectations. Avery currently generates some of the highest margins historically in the LGM business. While that's certainly admirable, we believe current conditions represent a cyclical peak and midcycle margins are likely to contract as competition intensifies and prices fall.
The company also made meaningful progress in driving profitability improvements in both the retail branding and industry & health materials segments. Operating leverage has continued to outpace our expectations in the retail branding business, which has been enhanced further by solid growth rates--especially on the RFID side of the business. While we remain skeptics of the long-term competitive advantage in this business, the company could prove us wrong if it pivots toward a combined software/hardware solution that induces switching costs for large customers.
Avery Dennison is engaged in the production of pressure-sensitive materials and a variety of tickets, tags, labels and other converted products. The company sells its pressure-sensitive materials to label printers and converters that convert the materials into labels and other products through embossing, printing, stamping and die-cutting. The company sells other pressure-sensitive materials in converted form as tapes and reflective sheeting. The company also manufactures and sells a variety of other converted products and items not involving pressure-sensitive components, such as fasteners, tickets, tags, radio-frequency identification inlays and tags, and imprinting equipment and related solutions.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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