Morningstar | Avery Surges Ahead on Another Strong Quarter; Raising FVE to $83
Avery's two largest segments, labels and retail branding, performed solidly during the second quarter. Organic growth was 7.5% versus the prior year, driven by passed-on input cost increases and higher global volumes. With the company poised to benefit from both currency effects and additional price increases, management has lifted adjusted EPS guidance by 7.5 cents to $5.95-$6.10. We now expect sales to rise to just over $7.15 billion, and adjusted EPS of $6.07 in 2018. Having lifted our near-term and medium-term forecasts for Avery, we've increased our fair value estimate to $83 per share from $78, and have left our no-moat rating in place.Within the Label and Graphic Materials segment, adjusted operating margins fell slightly to 13.8% in the second quarter, with price increases lagging input-cost inflation. Organic revenue growth was robust, at 7.3% during the quarter, one of the strongest quarters since late 2016. Although we expect sales growth in the segment to remain solid, we think Avery will struggle to maintain these margins indefinitely. We don't believe the segment operates with a sustainable competitive advantage. It's our expectation that either increased price competition will narrow operating margins, or Avery will have to continually spend on restructuring projects to keep margins at current levels.
Performance was equally impressive in retail branding and information solutions. Twenty percent sales growth for RFID inventory management systems facilitated nearly 10% in segment organic growth during the quarter. Adjusted segment operating margins widened to 11.2%, up from 8.6% last year as restructuring efforts paid off. Given that this segment merely produces product labels, logos, embellishments, and RFID inventory tags, we see no reason the business should earn excess return on capital. However, we have lifted our near-term forecast to reflect higher operating income as restructuring efforts stave off the impact of increased competition.
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.
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