Morningstar | Avery Dennison Overcomes Currency Headwinds With Cost Savings in the Second Quarter. See Updated Analyst Note from 23 Jul 2019
Although Avery's second quarter yielded fairly lackluster organic revenue growth, the company maintained overall profitability. Consolidated sales fell 4.1% versus the second quarter of last year to $1.2 billion, which includes a 5% currency headwind. Excluding currency, organic sales grew just under 1%, which is far slower than the mid-single-digit rate of 2018. Adjusted operating income rose roughly 1% to $216.6 million in the second quarter, as operating margins expanded versus the year prior due to increased efficiency and a favorable product mix shift. Avery's second-quarter results were consistent with our broader outlook for the coming years, and we maintain our $87 per share fair value estimate and our no-moat rating.Labels and graphic materials growth slowed, with organic growth falling to 1% versus 7% a year ago. Labels and packaging materials were the source of the slowdown, which is consistent with the weak box demand we've seen thus far in 2019. Management called out stronger results in its higher-value product lines such as graphics and reflective products. Profitability stayed strong, with segment adjusted operating margins flat at 13.8% versus last year. Over the remainder of the year, currency headwinds should abate, leading to strengthening sales growth for the segment. In the long run, we still see substantial growth potential as emerging markets increase shipping volumes and use more graphic and reflective materials.
Results in the retail branding segment were more robust, led by sustained growth in RFID sales. Organic growth of 4% was offset somewhat by unfavorable exchange rate movements, resulting in sales remaining roughly flat year on year at $418 million. However, adjusted operating margins expanded 130 basis points year on year to 12.5% due to increased efficiency and a favorable product mix shift. Regardless, we remain skeptical that today's profit margins will persist in the long run, as competition intensifies in the RFID market.
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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